REFERENCE: Ref.09_09 on March 1,2007,Mattie Company Received an Order to Sell a Sell

REFERENCE: Ref.09_09
On March 1,2007,Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds.The machine was shipped and payment was received on March 1,2008.On March 1,2007,Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1,2008 at a price of $380,000.Mattie properly designates the option as a fair hedge of the pound firm commitment.The option cost $2,000 and had a fair value of $2,200 on December 31,2007.The following spot exchange rates apply: Mattie'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 net impact on Mattie's 2007 income as a result of this fair value hedge of a firm commitment?

A) $1,660.40 decrease.
B) $1,760.60 decrease.
C) $2,240.40 decrease.
D) $1,660.40 increase.
E) $2,240.60 increase.

Correct Answer:

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