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

question 68

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: $$\begin{array} { | l | c | } \hline \text { Date } & \text { Spot Rate } \\\hline \text { October 1, 2011 } & \$ 2.00 \\\hline \text { December 31, 2011 } & \$ 1.97 \\\hline \text { February 1,2012 } & \$ 2.01 \\\hline\end{array}$$
-What is the amount of option expense for 2012 from these transactions?

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

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