On March 1, 2013, Mattie Company Received an Order to Sell

question 73

Multiple Choice

On March 1, 2013, 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, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 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, 2013. The following spot exchange rates apply: $\begin{array}{|l|c|}\hline \text { Date } & \text { Spot Rate } \\\hline \text { March 1,2013 } & \$ 1.90 \\\hline \text { December 31,2013 } & \$ 1.89 \\\hline \text { March 1,2014 } & \$ 1.84 \\\hline\end{array}$ Mattie'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 net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?

• A)$0
• B)$10,000 increase.
• C)$10,000 decrease.
• D)$20,000 increase.
• E)$20,000 decrease.

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