On May 1, 2011, Mosby Company Received an Order to Sell

question 60

Multiple Choice

On May 1, 2011, 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, 2012. On May 1, 2011, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2012 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, 2011. 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 overall result of having entered into this hedge of exposure to foreign exchange risk?

• A) $0
• B) $9,000 net loss on the option.
• C) $9,000 net gain on the option.
• D) $2,000 net gain on the option.
• E) $2,000 net loss.

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