REFERENCE: Ref.09_09 on March 1,2007,Mattie Company Received an Order to Sell a Sell

question 30

Multiple Choice

REFERENCE: Ref.09_09
On March 1,2007,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 1,2008.On March 1,2007,Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1,2008 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 31,2007.The following spot exchange rates apply: 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 impact on Mattie's 2008 income as a result of this fair value hedge of a firm commitment?

• A)$379,760.60 decrease.
• B)$8,360.60 increase.
• C)$8,360.60 decrease.
• D)$ 4,390.40 decrease.
• E)$379,760.60 increase.

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