On March 1, 2011, Mattie Company Received an Order to Sell

question 38

Multiple Choice

On March 1, 2011, 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, 2012. On March 1, 2011, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2012 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, 2011. 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 2012 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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Definitions:

Intervention

An action or process of intervening, often implemented to bring about a change or influence the outcome in a positive way.

Chi-Square Test Statistic

A value calculated during a Chi-Square Test that measures the difference between observed and expected frequencies, used to assess the evidence against a null hypothesis.

One-Sample Test

A statistical test used to determine if the mean of a single sample differs significantly from a known or hypothesized population mean.

Variance

A measure of dispersion that represents the average of the squared differences from the mean.