On October 1, 2011, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2012, at a price of 100,000 British pounds. On October 1, 2011, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2011, the option has a fair value of $1,600. The following spot exchange rates apply:

What is the 2012 effect on net income as a result of these transactions?

A) $195,000
B) $201,600
C) $201,000
D) $202,600
E) $203,000

Question

On October 1, 2011, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2012, at a price of 100,000 British pounds. On October 1, 2011, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2011, the option has a fair value of $1,600. The following spot exchange rates apply:

What is the 2012 effect on net income as a result of these transactions?

A) $195,000 
B) $201,600 
C) $201,000 
D) $202,600 
E) $203,000

Quizplus · Accepted Answer

The Answer of On October 1, 2011, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2012, at a price of 100,000 British pounds. On October 1, 2011, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2011, the option has a fair value of $1,600. The following spot exchange rates apply:

What is the 2012 effect on net income as a result of these transactions?

A) $195,000 
B) $201,600 
C) $201,000 
D) $202,600 
E) $203,000

On October 1, 2011, Eagle Company Forecasts the Purchase of Inventory