Atherton Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply: $\begin{array}{ll}
\text { Option Strike Price } & \$ 4.34 \
\text { Option Cost } & \$ 5,000 \
\text { January 17 Spot Rate } & \$ 4.34 \
\text { April 17 Spot Rate } & \$ 4.26
\end{array}$ What amount will Atherton include as an option expense in net income for the period January 17 to April 17?
A)$4,000
B)$4,260
C)$4,340
D)$5,000
E)$5,260

Question

Quizplus · Accepted Answer

The option expense is the cost of the option, which is $5,000. This cost is recognized in net income regardless of whether the option is exercised or not.

Atherton Inc What Amount Will Atherton Include as an Option Expense in a Foreign