On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803.
What was the net impact on Mattie's 2013 income as a result of this fair value hedge of a firm commitment?
A) $1,800.00 decrease.
B) $1,760.60 decrease.
C) $2,240.40 decrease.
D) $1,660.40 increase.
E) $2,240.60 increase.

Question

On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply:  Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803.
What was the net impact on Mattie's 2013 income as a result of this fair value hedge of a firm commitment?
A) $1,800.00 decrease. 
B) $1,760.60 decrease. 
C) $2,240.40 decrease. 
D) $1,660.40 increase. 
E) $2,240.60 increase.

Quizplus · Accepted Answer

$1.89 - $1.90 = ($.001) × ≤200,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm Commitment$2,200 - $2,000 = $200 Option Value Increase($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction in 2013 Net Income

On March 1, 2013, Mattie Company Received an Order to Sell