What is the net impact on Dos Santos Company's 2014 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2014.
a. $80,000 decrease in net income.
b. $80,600 decrease in net income.
c. $81,100 decrease in net income.
d. $83,100 decrease in net income.
On November 1, 2013, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2014, at a price of 200,000 Brazilian reals. On November 1, 2013, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,100. The following spot exchange rates apply:
______________________________U.S. Dollar per
Date ________________________ Brazilian Real
November 1, 2013 ............................ $0.40
December 31, 2013 ............................ 0.38
February 1, 2014 ............................... 0.41