1. Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Japan for 42,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Japanese yen rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

   The spot exchange rate is JPY112/USD

   The six month forward rate is JPY120/USD

   CVT's forecast for 6-month spot rates is JPY110/USD

   The budget rate, or the highest acceptable purchase price for this project, is $400,000 or 105/$

   Current borrowing rate in Japan is 4%.

   If CVT locks in the forward hedge at 120/$ and the spot rate when the transaction was recorded on the books was 112/$, this will result in a "foreign exchange accounting transaction ________ of ________.

   		loss; 25,000.
   		loss; $25,000
   		gain; 25,000.
   		gain; $25,000