On October 1, 2011, Eagle Company Forecasts the Purchase of Inventory

question 22

Multiple Choice

On October 1, 2011, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2012, at a price of 100,000 British pounds. On October 1, 2011, 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, 2011, the option has a fair value of $1,600. The following spot exchange rates apply: What is the 2012 effect on net income as a result of these transactions?

• A)$195,000
• B)$201,600
• C)$201,000
• D)$202,600
• E)$203,000

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Definitions:

Hippocampus

A major component of the brain involved in forming new memories and is associated with learning and emotions.

Endorphins

Natural, pain-relieving chemicals produced by the body that also contribute to feelings of pleasure and well-being.

Agonist

An agonist is a chemical or drug that binds to receptors in the brain and causes a reaction, often mimicking the action of naturally occurring substances.

Antagonist

Antagonist is a term used in various contexts to denote a force or character that opposes someone or something else, or in pharmacology, a substance that inhibits or blocks physiological actions.