Torres Corporation (a U.S.-based company) expects to order goods from a foreign
ID: 2572789 • Letter: T
Question
Torres Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 106,000 pounds, with delivery and payment to be made on September 20. On July 20, Torres purchased a two-month call option on 106,000 pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The option has a strike price of $1.35 per pound and costs $1,060. The spot rate for pounds is $1.35 on June 20 and $1.40 on September 20. What amount will Torres Corporation report as an option expense in net income for the quarter ended September 30?
Multiple Choice
$530.
$5,300.
$2,300.
$1,060.
Explanation / Answer
Torres Corporation (a U.S.-based company) may have pounds 106000 receivable on on September 20.
On July 20, Torres purchased a two-month call option on 106,000 pounds @ $1060.
Strike price = $1.35
Spot price on September 20 = $1.40
Profit on expiry of call option = ($1.40 - $1.35) *106000 = $5300
Option expense = $1060