Question

In: Accounting

On December 1, 20x1 Pimlico made sales to a customer in India and recorded Accounts Receivable...

On December 1, 20x1 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 20x2 to pay. On December 1, 20x1, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 20x2, which was the spot rate on December 1, 20x1. On December 31, 20x1, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees.

What is the fair value of the option on December 1, 20x1?

A. $0

B. $500

C. $400

D. $10,000

What is the fair value of the option on December 31, 20x1?

A. $0

B. $500

C. $400

D. $10,000

What is the foreign currency exchange gain or loss on December 31, 20x1?

A. $50,000 loss

B. $50,000 gain

C. $10,000 gain

D. $10,000 loss

Expert Solution

1. The answer will be option (b)$500. The fair value of the option on December 1, 20x1 is $500. It is because on December 1, 20x1, Pimlico paid $500 for a put option as given in the question. The other options(a), (c) and (d) are not correct because of the above reason.

2. The answer will be option (c) $400 . It is because Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees and the option premium was$0.004 per 100 rupees. So, the calculation can be done as follows:

(10,000,000/100)*.004

=$ 400

The other options(a), (b) and (d) are not correct because of the above calculation.

3. The answer will be option (b) $50,000 gain . It is because on December 1, 20x1, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 20x2, which was the spot rate on December 1, 20x1 while on December 31, 20x1, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees.

So, the calculation can be done as follows:

10,000,000/100*(2.8-2.3)

= $50,000 gain

The other options(a), (c) and (d) are not correct because of the above calculation.

ekkarill92 answered 2 years ago

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