Reference no: EM132596006
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 forecasted foreign currency purchase? Assume that the raw materials are consumed and become a part of cost of goods sold in Year 2.
A) A $71,100 decrease in net income.
B) A $70,000 decrease in net income.
C) A $70,900 decrease in net income.
D) A $72,900 decrease in net income.