Palmer Corporation, operating as a U.S. corporation, expects to order goods from a foreign supplier at a price of 200,000 pounds, with delivery and payment to be made on April 15. On January 15, Palmer purchased a three-month call option on 200,000 pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The option has a strike price of $0.25 per pound and costs $2,000. The spot rate for pounds is $0.25 on January 15 and $0.22 on April 15.
What amount will Palmer Corporation report as an option expense in net income during the period January 15 to April 15?
a. $600.
b. $1,000.
c. $2,000.
d. $4,400.
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