On March 1, 2015, Werner Corp. received an order for parts from a Mexican customer at a price of 500,000 Mexican pesos with a delivery date of April 30, 2015. On March 1, when the U.S. dollar– Mexican peso spot rate is $0.115, Werner Corp. entered into a two-month forward contract to sell 500,000 pesos at a forward rate of $0.12 per peso. It designates the forward contract as a fair value hedge of the firm commitment to receive pesos, and the fair value of the firm commitment is measured by referring to changes in the peso forward rate. Werner delivers the parts and receives payment on April 30, 2015, when the peso spot rate is $0.118. On March 31, 2015, the Mexican peso spot rate is $0.123, and the forward contract has a fair value of $1,250.
What is the net increase or decrease in cash flow from having entered into this forward contract hedge?
a. $–0–.
b. $1,000 increase in cash flow.
c. $1,500 decrease in cash flow.
d. $2,500 increase in cash flow.
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