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.
Use the following information for Problems 21 and 22.
On November 1, 2011, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2012, at a price of 200,000 Brazilian reals. On November 1, 2011, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2011, the option has a fair value of $1,100. The following spot exchange rates apply:
Date | U.S. Dollar per Brazilian Real |
November 1, 2011 | $0.40 |
December 31, 2011 | 0.38 |
February 1, 2012 | 0.41 |
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