Question
Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 2,000,000 francs on
Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 2,000,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 2,000,000 francs in three months. Maas selects a strike price of $0.79 per franc when the spot rate is $0.79 and pays a premium of $0.003 per franc. The spot rate increases to $0.794 at December 31, 2020, causing the fair value of the option to increase to $13,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.81, resulting in a fair value for the option of $40,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements.
b. What is the overall impact on net income over the two accounting periods?
c. What is the net cash outflow to acquire the raw materials?
The answers are NOT -164,000 for b, and 164,000 for c.
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