On October 1, 2011, Eagle Company Forecasts the Purchase of Inventory

Multiple Choice

On October 1, 2011, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2012, at a price of 100,000 British pounds. On October 1, 2011, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2011, the option has a fair value of $1,600. The following spot exchange rates apply: What is the amount of option expense for 2012 from these transactions?

A) $1,000.
B) $1,600.
C) $2,500.
D) $2,600.
E) $0.