What is the net impact on Dos Santos Company's 2017 net income as a result of this hedge of a forecasted foreign currency transaction?
a. $-0-.
b. $400 decrease in net income.
c. $1,000 decrease in net income.
d. $1,400 decrease in net income.
On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, 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, 2017, the option has a fair value of $1,100. The following spot exchange rates apply:
_______________________________ U.S. Dollar per
Date ___________________________ Brazilian Real
November 1, 2017 .......................... $0.40
December 31, 2017......................... 0.38
February 1, 2018 ............................ 0.41