What is the net impact on Black Lion Company's Year 1 net income as a result of
Question:
What is the net impact on Black Lion Company's Year 1 net income as a result of this hedge of a forecasted foreign currency purchase?
a. $0.
b. A $200 increase in net income.
c. A $300 decrease in net income.
d. An $800 decrease in net income.
On November 1, Year 1, Black Lion Company forecasts the purchase of raw materials from an Argentinian supplier on February 1, Year 2, at a price of 200,000 Argentinian pesos. On November 1, Year 1, Black Lion pays $1,200 for a three-month call option on 200,000 Argentinian pesos with a strike price of $0.35 per peso. The option is properly designated as a cash flow hedge of a forecasted foreign currency transaction. On December 31, Year 1, the option has a fair value of $900. The following spot exchange rates apply:
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