Question
On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British
On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle pays $1,800 for a three-month call option on 100,000 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. On December 31, 2021, the option has a fair value of $1,600. The following spot exchange rates apply:
Date | Spot Rate | ||
October 1, 2021 | $ | 2.00 | |
December 31, 2021 | $ | 1.97 | |
February 1, 2022 | $ | 2.01 | |
What is the net impact on Eagles 2021 net income as a result of this hedge of a forecasted foreign currency transaction?
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