On May 1, 2018, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2019. On May 1, 2018, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2019 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2018. The following spot exchange rates apply:DateSpot RateMay 1, 2018$0.095 December 31, 2018 0.094 March 1, 2019 0.089 ??Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803.?What was the overall result of having entered
into this hedge of exposure to foreign exchange risk?
A. $9,000 net gain on the option.
B. $2,000 net gain on the option.
C. $9,000 net loss on the option.
D. $0.
E. $2,000 net loss.
Answer: A
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