Hi! I need help with this homework problem, please and thank you! It has to deal with not hedging, forward contract with fair value hedge, and option contract with cash flow hedge.

There is no cost of goods sold effect.

Requirements:

1. You have to find the net income effect for first year and second year and net those out and give one solid number as a result, and say what is the net income effect (decrease or increase).
2. Forward contract as a fair value hedge, dollar impact of all of the transactions for all of 2018. Have to net out all income effects (gains, losses, revenues, expenses, etc). Do for 2018 as a single number and for 2019 as well.
3. Option contract as a cash flow hedge, dollar impact of all transaction for 2018, net it together and do the same for 2019.
4. What would the option contract be at the end before you close it out, which in this case would be January 31 and would that be a debit or credit balance.

of bepalen -50.00 On December 1, 2018, you purchased 1,000 boxes of raw materials from an Italian company for a total of 244,000 euros. Payment will be made on January 31, 2019. Relevant exchange rates are as follows: Option Premium Forward Rate for Jan. 31 Date Spot Rate for Jan. 31 (strike price = $ 0.80) December 1, 2018 $ 0.80 $ 0.82 $ 0.025 December 31, 2018 0.83 0.86 0.050 January 31, 2019 0.84 Not available Not available You are a December fiscal year end firm and continue to retain all raw materials through the end of 2019. Required: 1. If you choose not to hedge this transaction, the combined dollar impact on net income for both 2018 and 2019 will be decrease / increase (circle one). 2. If you choose to hedge this transaction using a forward contract and use fair value hedge accounting: a. the dollar impact on net income in 2018 will be (circle one) decrease / increase b. the dollar impact on net income in 2019 will be (circle one) decrease / increase 3. If you choose to hedge this transaction using an option contract and use cash flow hedge accounting: a. the dollar impact on net income in 2018 will be (circle one) decrease / increase b. the dollar impact on net income in 2019 will be (circle one) decrease / increase c. the Option account balance just prior to settlement of the payable is (circle one) debit/credit of bepalen -50.00 On December 1, 2018, you purchased 1,000 boxes of raw materials from an Italian company for a total of 244,000 euros. Payment will be made on January 31, 2019. Relevant exchange rates are as follows: Option Premium Forward Rate for Jan. 31 Date Spot Rate for Jan. 31 (strike price = $ 0.80) December 1, 2018 $ 0.80 $ 0.82 $ 0.025 December 31, 2018 0.83 0.86 0.050 January 31, 2019 0.84 Not available Not available You are a December fiscal year end firm and continue to retain all raw materials through the end of 2019. Required: 1. If you choose not to hedge this transaction, the combined dollar impact on net income for both 2018 and 2019 will be decrease / increase (circle one). 2. If you choose to hedge this transaction using a forward contract and use fair value hedge accounting: a. the dollar impact on net income in 2018 will be (circle one) decrease / increase b. the dollar impact on net income in 2019 will be (circle one) decrease / increase 3. If you choose to hedge this transaction using an option contract and use cash flow hedge accounting: a. the dollar impact on net income in 2018 will be (circle one) decrease / increase b. the dollar impact on net income in 2019 will be (circle one) decrease / increase c. the Option account balance just prior to settlement of the payable is (circle one) debit/credit