On October 1, 2013, Eagle Company Forecasts the Purchase of Inventory

question 93

Multiple Choice

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: $\begin{array}{|l|c|}\hline \text { Date } & \text { Spot Rate } \\\hline \text { October 1, 2013 } & \$ 2.00 \\\hline \text { December 31,2013 } & \$ 1.97 \\\hline \text { February 1,2014 } & \$ 2.01 \\\hline\end{array}$ What is the amount of option expense for 2014 from these transactions?

• A)$1,000.
• B)$1,600.
• C)$2,500.
• D)$2,600.
• E)$0.

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Definitions:

Trade Price

The price at which goods or services are traded between companies, often lower than retail price.

International Trade

The exchange of goods, services, and capital between countries or territories, influenced by comparative advantage, tariffs, and trade agreements.

Better Off

Refers to a situation where an individual's or group's economic situation or welfare has improved.

Worse Off

A situation in which an individual or group is in a less favorable or disadvantageous position compared to a previous state or to others.