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

question 18

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: $$\begin{array} { | l | c | } \hline \text { Date } & \text { Spot Rate } \\\hline \text { March 1, 2011 } & \$ 1.90 \\\hline \text { December 31, 2011 } & \$ 1.89 \\\hline \text { March 1, 2012 } & \$ 1.84 \\\hline\end{array}$$ 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 2011 income as a result of this fair value hedge of a firm commitment?

• A) $1,800.00 decrease.
• B) $1,760.60 decrease.
• C) $2,240.40 decrease.
• D) $1,660.40 increase.
• E) $2,240.60 increase.

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Definitions:

Probability Density Function

A mathematical function that describes the likelihood of a continuous random variable taking on a specific value.

Normal Distribution

A bell-shaped frequency distribution that is symmetrical about the mean, describing how many data points, given continuous variables, distribute in nature.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, indicating how much the values in a data set deviate from the mean.

Mean High Temperature

Mean high temperature is the average of the highest temperatures over a specific time period for a particular place.