Exercise 6 (LO 4, 5) Hedging a commitment; forecasted transaction—forward contract vs. option. Jackson, a U.S. company, acquires a variety of raw materials from foreign vendors with amounts payable in foreign currency (FC). The company needs to acquire 20,000 units of raw material, and the goods are expected to have a price of 100,000 FC. Assume that the inventory can be subsequently sold to U.S. customers for $160,000.

Jackson is contemplating committing to the purchase of the inventory on September 1 with delivery on November 1. However, rather than making a commitment, the company could forecast a probable purchase of inventory with delivery on November 1. In either case, assume that on September 1 the company would either

(a) acquire a forward contract to buy 100,000 FC with a forward date of November 1 or

(b) acquire an option to buy FC in November at a strike price of $1.25. The option premium is expected to cost $2,100.