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: Option Strike Price $ 4.34
Option Cost $5,000
January 17 Spot Rate $ 4.34
April 17 Spot Rate $ 4.26
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 included in net income is the cost of the option, which is $5,000.