On March 1, 2021, 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, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 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, 2021. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?
A) $0
B) $10,000 increase.
C) $10,000 decrease.
D) $20,000 increase.
E) $20,000 decrease.

Question

On March 1, 2021, 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, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 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, 2021. The following spot exchange rates apply:  Mattie's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?
A) $0 
B) $10,000 increase. 
C) $10,000 decrease. 
D) $20,000 increase. 
E) $20,000 decrease.

Quizplus · Accepted Answer

The Answer of On March 1, 2021, 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, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 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, 2021. The following spot exchange rates apply:  Mattie's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?
A) $0 
B) $10,000 increase. 
C) $10,000 decrease. 
D) $20,000 increase. 
E) $20,000 decrease.

On March 1, 2021, Mattie Company Received an Order to Sell