On September 1, Year 1, Keefer Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dol received

on March 1, Year 2. On September 1, Year 1, Keefer Company purchased a put option giving it the right to sell 100,000 Canadian Keefer Company properly designates the option as a fair value hedge of the Canadian-dollar firm com- mitment. The option cost $1,700 a 1. The fair value of the firm commitment is measured through refer- ence to changes in the spot rate. The following spot exchange rates Date U.S. Dollar per Canadian Dollar September 1, Year 1 . . . . . . .$0.75 December 31, Year 1 . . . . . .0.73 March 1, Year 2 . . . . . . . . . .0.71 Keefer Companys incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 pe Solution: US Dollar Value Sept 1, Year 1 0.75 75000 Dec 31, Year 1 0.73 73000 -2000 Mar 1, Year 2 0.71 71000 -2000 What was the net impact on Keefer Companys Year 2 income as a result of this fair value hedge of a firm commitment? c. A $74,160.60 increase in income

8. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to forei d. A $2,300 increase in cash flow. Exchange Rate loss Less: Option cost Increase in cash flow 4,000 (1,700) 2,300

tomer in Canada at a price of 100,000 Canadian dollars. The machine was shipped and payment was ut option giving it the right to sell 100,000 Canadian dollars on March 1, Year 2, at a price of $75,000. -dollar firm com- mitment. The option cost $1,700 and had a fair value of $2,800 on December 31, Year in the spot rate. The following spot exchange rates apply:

r for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803

alue hedge of a firm commitment?

eign currency option to hedge this exposure to foreign exchange risk?