On November 1, 2011, Cahoon Company Sold Some Limited Edition

Multiple Choice

On November 1, 2011, Cahoon Company sold some limited edition art prints to Sitake Company for ¥47,850,000 to be paid on January 1, 2012. The current exchange rate on November 1, 2011, was ¥110=$1, so the total payment at the current exchange rate would be equal to $435,000. Cahoon entered into a forward contract with a large bank to guarantee the number of dollars to be received. According to the terms of the contract, if ¥47,850,000 is worth less than $435,000, the bank will pay Cahoon the difference in cash. Likewise, if ¥47,850,000 is worth more than $435,000, Cahoon must pay the bank the difference in cash. Assuming the exchange rate on December 31, 2011 is ¥115=$1, what amount will Cahoon disclose as the fair value of the forward contract on December 31, 2011 (answers rounded to the nearest dollar) ?

A) $0
B) $18,913
C) $20,714
D) $416,087