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5. Use of an Option to Hedge a Forecasted Transaction (10 points) On October 1, 2018, Eagle Company forecasts the sale of inventory to a
5. Use of an Option to Hedge a Forecasted Transaction (10 points) On October 1, 2018, Eagle Company forecasts the sale of inventory to a British customer on June 1, 2019, at a price of 200,000 British pounds. On October 1, 2018, Eagle pays $3,000 for a six-month put option on 200,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. The following spot exchange rates apply: Spot Rate Time Intrinsic Fair Value Value Value Date October 1, 2018 $2.00 $3,000 December 31, 2018 $2.02 $1,600 March 31, 2019 $1.97 $6,500 June 1, 2019 $1.80 a. Complete the table above Prepare the journal entries to record the following: b. Purchase of the option on October 1 c. Adjusting entries at December 31 and March 31 d. Sale of inventory on June 1
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