The option hedge of a forecasted transaction

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Reference no: EM131867994

Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,000,000 marks on March 15, 2018. To hedge this forecasted transaction, the company acquires a three-month call option to purchase 1,000,000 marks on December 15, 2017. Leickner selects a strike price of $0.69 per mark, paying a premium of $0.001 per unit, when the spot rate is $0.69. The spot rate increases to $0.697 at December 31, 2017, causing the fair value of the option to increase to $7,5,00. By March 15, 2018, when the raw materials are purchased, the spot rate has climbed to $0.71, resulting in a fair value for the option of $20,000.

Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials, assuming that December 31 is Leickner's year-end and that the raw materials are included in the cost of goods sold in 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Reference no: EM131867994

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