What is the net impact on Dos Santos Companys 2012 net income as a result of this
Question:
What is the net impact on Dos Santos Company’s 2012 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2012.
a. $80,000 decrease in net income.
b. $80,600 decease in net income.
c. $81,100 decrease in net income.
d. $83,100 decrease in net income.
On November 1, 2011, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2012, at a price of 200,000 Brazilian reals. On November 1, 2011, 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, 2011, the option has a fair value of $1,100. The following spot exchange rates apply:
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