On May 1, 2013, Mosby Company Received an Order to Sell

question 72

Multiple Choice

On May 1, 2013, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply: $\begin{array}{|l|c|}\hline \text { Date } & \text { Spot Rate } \\\hline \text { May 1,2013 } & \$ 0.095 \\\hline \text { December 31,2013 } & \$ 0.094 \\\hline \text { March 1,2014 } & \$ 0.089 \\\hline\end{array}$ Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the overall result of having entered into this hedge of exposure to foreign exchange risk?

• A)$0
• B)$9,000 net loss on the option.
• C)$9,000 net gain on the option.
• D)$2,000 net gain on the option.
• E)$2,000 net loss.

---

Definitions:

Reposition

The act of placing or arranging someone or something in a new or different position.

Eye Shields

Protective devices worn over the eyes to prevent injury or shield from bright light or harmful particles.

Phenylalanine Hydroxylase

An enzyme that converts the amino acid phenylalanine into tyrosine, its deficiency can lead to phenylketonuria.

PKU

Phenylketonuria, a genetic disorder characterized by the inability to break down the amino acid phenylalanine, leading to harmful levels in the body unless managed with a special diet.