What is the net impact on Dos Santos Company's 2017 net income as a result of this

Question:

What is the net impact on Dos Santos Company's 2017 net income as a result of this hedge of a forecasted foreign currency transaction?
a. $-0-.
b. $400 decrease in net income.
c. $1,000 decrease in net income.
d. $1,400 decrease in net income.
On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply:
_______________________________ U.S. Dollar per
Date ___________________________ Brazilian Real
November 1, 2017 .......................... $0.40
December 31, 2017......................... 0.38
February 1, 2018 ............................ 0.41
Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Advanced Accounting

ISBN: 978-1259444951

13th edition

Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupni

Question Posted: