Woolsey Corporation, a U -Atherton, Inc What Amount Will Atherton Include as an Option Expense in a British

Multiple Choice

Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October. The following exchange rates apply: $$\begin{array} { | l | l | } \hline \text { Option strike price } & \$ 2.17 \\\hline \text { Option cost } & \$ 4,000 \\\hline \text { July 24 spot rate } & \$ 2.17 \\\hline \text { October 24 spot rate } & \$ 2.13 \\\hline \text { October 24 option premium } & \$ .04 \\\hline\end{array}$$
-Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply: $$\begin{array} { | l | r | } \hline \text { Option strike price } & \$ 4.34 \\\hline \text { Option cost } & \$ 5,000 \\\hline \text { July 24 spot rate } & \$ 4.34 \\\hline \text { April 17 spot rate } & \$ 4.26 \\\hline\end{array}$$
What amount will Atherton include as an option expense in net income for the period January 17 to April 17?

A) $4,000
B) $4,260
C) $4,340
D) $5,000
E) $5,260