Problem 8: On Oct 1, 2020, 5J Inc. sold on account an inventory to a US-based company at a price of $5,000 collectible on January 30, 2021. On Nov 1, 2020, 5J purchased on account an inventory to a US-based company at a price of $8,000 payable on Mar 2, 2021.

On Oct 1, 2020, in order to hedge the foreign currency risk related to its foreign currency denominated account receivable. 5J acquired a 120-day put option from RCBC to sell $5,000 at a strike price of P40 by paying option premium of P500. On Nov 1, 2020, in order to hedge the foreign currency risk related to its foreign currency denominated account payable, 5J acquired a 120-day call option from RCBC to buy $8,000 at an option price of P41 by paying option premium of P600.

The following additional data are provided:

10/1/2020 11/1/2020 12/31/2020 1/30/2021 3/2/2021

Buying spot rate P40 P38 P36 P37 P39

Selling spot rate P39 P41 P44 P41 P42

FV of put option ? ? P23,000 ? ?

FV of call option ? ? P25,000 ? ?

1. What is the net foreign currency gain or loss as a result of hedging activity to be reported by 5J Inc. for the year end Dec 31, 2020?

a. 2,900 net gain

b. 44,000 net gain

c. 46,900 net gain

d. 44,000 net loss

1. What is the net foreign currency gain or loss as a result of hedging activity to be reported by 5J Inc. for the year end Dec 31, 2021?

a. 4,000 net loss

b. 21,000 net loss

c. 25,000 net loss

d. 21,000 net gain