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: 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

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:  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

Quizplus · Accepted Answer

Cost of the Option Contract $5,000