REFERENCE: Ref.09_10 on October 1,2007,Eagle Company Forecasts the Purchase of Inventory from Inventory

question 5

Multiple Choice

REFERENCE: Ref.09_10
On October 1,2007,Eagle Company forecasts the purchase of inventory from a British supplier on February 1,2008,at a price of 100,000 British pounds.On October 1,2007,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 31,2007,the option has a fair value of $1,600.The following spot exchange rates apply:
-What is the amount of option expense for 2008 from these transactions?

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

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Definitions:

Hierarchy

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