## Forward Exchange Contracts – Entered for Speculation / Trading
When a forward exchange contract is entered not to hedge a specific transaction but to profit from exchange rate movements, it is a speculative / trading contract.
---
### Accounting Treatment
For speculative contracts, no premium/discount amortisation is done.
Instead:
- Profit or Loss is computed by comparing:
- Contract Rate (Forward Rate) – the rate at which the contract was entered
- Sale Rate – the rate at which the contract is sold / closed out
Formula:
```
Profit / Loss = (Sale Rate − Contract Rate) × Contract Amount
```
- Profit (Sale Rate > Contract Rate for a buy contract) → Cr P&L
- Loss (Sale Rate < Contract Rate for a buy contract) → Dr P&L
Timing: Profit/Loss is recognised on the date the contract is sold/closed, NOT spread over the contract period.
---
### Journal Entry
```
On closing/selling the speculative contract:
If Profit:
Dr Bank / Forward Contract A/c
Cr Exchange Gain (P&L)
If Loss:
Dr Exchange Loss (P&L)
Cr Bank / Forward Contract A/c
```
### Example 1
Illus 5 CDR – Speculative Forward Contract
Details:
- Contract Rate (forward rate at inception) = ₹47.10/$
- Sale Rate (when contract is sold) = ₹55.10/$ (approximately)
- Contract Amount = $1,00,000
- Profit = (55.10 − 47.10) × 1,00,000 = ₹8,00,000
Timeline: Contract taken on 1st Dec; contract sold on 31st Jan (at year-end, value may be re-measured but profit booked on sale date).
```
31.01 (date of sale):
Dr Bank A/c 8,00,000
Cr Exchange Gain (P&L) 8,00,000
```
Note: The entire profit is booked on 31.01 (date of closing), not spread over Dec–Jan.
### Example 2
Extra Example – Speculative Contract Resulting in Loss
A Ltd entered a forward contract to buy $15,000 at ₹46/$ (contract rate) when the spot rate was ₹45/$.
After 2 months, the contract was sold at ₹44.50/$.
- Contract Rate = ₹46 (buying $ at this rate)
- Sale Rate = ₹44.50 (contract sold; $ now worth only ₹44.50)
- Loss per $ = 46.00 − 44.50 = ₹1.50
- Total Loss = 15,000 × 1.50 = ₹22,500
Book on the date the contract is sold (after 2 months):
```
Dr Exchange Loss (P&L) 22,500
Cr Forward Contract A/c 22,500
```
Note: No amortisation during the 2-month holding period since this is speculative.