On May 1, 2013, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply: Mosby'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 overall result of having entered into this hedge of exposure to foreign exchange risk?
A) $0
B) $9,000 net loss on the option.
C) $9,000 net gain on the option.
D) $2,000 net gain on the option.
E) $2,000 net loss.

Question

On May 1, 2013, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply:  Mosby'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 overall result of having entered into this hedge of exposure to foreign exchange risk?
A) $0 
B) $9,000 net loss on the option. 
C) $9,000 net gain on the option. 
D) $2,000 net gain on the option. 
E) $2,000 net loss.

Quizplus · Accepted Answer

$.095 - $.089 = $.006 × MP2,000,000 = $12,000 Gain from Hedge - $3,000 Cost of Option = $9,000 Net Gain on Option

On May 1, 2013, Mosby Company Received an Order to Sell