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What is the net cash outflow to acquire the raw materials

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Question - Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 2,000,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 2,000,000 francs in three months. Maas selects a strike price of $0.79 per franc when the spot rate is $0.79 and pays a premium of $0.003 per franc. The spot rate increases to $0.794 at December 31, 2020, causing the fair value of the option to increase to $13,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.81, resulting in a fair value for the option of $40,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements.

-All journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials.

-What is the overall impact on net income over the two accounting periods?

-What is the net cash outflow to acquire the raw materials?

Reference no: EM133026388

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