On March 1, 2021, Mattie Company Received an Order to Sell

question 57

Multiple Choice

On March 1, 2021, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2021. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the net impact on Mattie's 2021 income as a result of this fair value hedge of a firm commitment?

• A) $1,800.00 decrease.
• B) $1,760.60 decrease.
• C) $2,240.40 decrease.
• D) $1,660.40 increase.
• E) $2,240.60 increase.

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Definitions:

Direct Investment

Investment made to acquire a lasting interest in or effective control over an enterprise operating in a foreign economy.

Global Entry Strategy

The plan and methods a company uses to enter international markets, including exporting, licensing, franchising, or establishing joint ventures and wholly owned subsidiaries.

Highest Possible Returns

The maximum profit or gain that can be achieved from an investment, reflecting the best outcome from financial decisions.

Economic Potential

The capacity of a product, service, or market to generate significant profits or economic benefits, assessed through factors like market size, demand, and scalability.