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Connect https//newconnect mheducation.com/flow/connect html Saved Help Save & Exit Subr Required information On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazian s February 1, 2018, at a price of 200,000 Brazilian reals On November 1, 2017, Dos Santos pplier on pays $1,500 for a three. h call option on 200,000 reals with a strike price of $0.40 per real. Dos Sentos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply U.S. Dollar per Brazilian Real $ 8.40 Date 2017 December 31, 2017 February 1, 2818 8.38 8.41 What is the net impact on Dos Santos Company's 2017 net income as a result of this hedge of a forecasted foreign currency transaction? arch

Explanation / Answer

Premium Paid, for Option purchase (For 200000 reals with strike Price of $0.40 for 3 Month Call Option (1) $1,500 Foreign exchange fluctuation on Feb1, 2018 ( $0.41-$0.40) $0.01/Reals Increase in cost due to foreign exchange Fluctuation on Feb1,2018 ( 200000 reals *$0.01) (2) $2,000.00 Net Saving to Dos Santos company by hedging the forcasted foreign currency Transaction by purchaing option will be ( $2000-$1500)= $500 On Dec 31, 2017 Dos Santos company will booked unrealised loss on fluctuation of Option fair value by $400 ( $1500-$1100)

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