REFERENCE: Ref.09_08 on May 1,2007,Mosby Company Received an Order to Sell a Sell

question 19

Multiple Choice

REFERENCE: Ref.09_08
On May 1,2007,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 1,2008.On May 1,2007,Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1,2008 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 31,2007.The following spot exchange rates apply: 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 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)$9,000 decrease.
• C)$9,000 increase.
• D)$2,000 increase.
• E)$2,000 decrease.

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