Cowdy Corporation expects that it will sell goods to a foreign customer at a price of...

Cowdy Corporation expects that it will sell goods to a foreign customer at a price of 1 million lire on March 15, Year 2. To hedge this forecasted transaction, a three-month put option to sell 1 million lire is acquired on December 15, Year 1. It selects a strike price of $0.15 per lire, paying a premium of $0.005 per unit, when the spot rate is $0.15. The spot rate decrease to $0.14 at December 31, Year 1, causing the fair value of the option to increase to $11,000. By March 15, Year 2, when the goods are delivered and payment is received from the customer, the spot rate has fallen to $0.13, resulting in a fair value for the option of $20,000.

Required:

What is the overall impact on net income in Year 1?
What is the overall impact on net income in Year 2?

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Expert Solution

ekkarill92 answered 11 months ago

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