Reference no: EM131705501

Question: On November 1, Year 1, Black Lion Company forecasts the purchase of raw materials from an Argentinian supplier on February 1, Year 2, at a price of 200,000 Argentinian pesos. On November 1, Year 1, Black Lion pays $1,200 for a three-month call option on 200,000 Argentinian pesos with a strike price of $0.35 per peso. The option is properly designated as a cash flow hedge of a forecasted foreign currency transaction. On December 31, Year 1, the option has a fair value of $900. The following spot exchange rates apply:

Date                                                           U.S. Dollar Per Argentinian Peso

November 1, Year 1  ......................................    $0.35

December 31, Year 1  ......................................... 0.30

February 1, Year 2  ........................................     0.36

What is the net impact on Black Lion Company's Year 2 net income as a result of this hedge of a forecast foreign currency purchase? Assume that the raw materials are consumed and become a part of cost of goods sold in Year 2.

a. A $70,000 decrease in net income.

b. A $70,900 decease in net income.

c. A $71,100 decrease in net income.

d. A $72,900 decrease in net income.