On January 5, 2019, our company receives a nonbinding purchase order for sale of merchandise to a customer in Slovakia, with delivery of the merchandise scheduled for June 30, 2019. The customer preliminarily agreed to pay €650,000 for the merchandise,
On January 5, 2019, our company receives a nonbinding purchase order for sale of merchandise to a customer in Slovakia, with delivery of the merchandise scheduled for June 30, 2019. The customer preliminarily agreed to pay €650,000 for the merchandise, and payment is due from the customer upon delivery. On January 5, 2019, our company also purchases an option that gives our company the right to sell (i.e., put) €650,000 on any date until June 30, 2019 (i.e., it is an “American-style” option) for $1.28:€1 (i.e., the spot rate on January 5, 2019). On January 5, 2019, the fair value of the option (i.e., the option premium) is $19,500. In addition, our company elected to immediately include in the determination of net income all of the change in option value attributable to factors excluded from the assessment of hedge effectiveness (i.e., the non-intrinsic-value components, like time value). The relevant exchange rates and related balances for the period from January 5, 2019, to June 30, 2019, are as follows:
| Option Contract | ||||||||
|---|---|---|---|---|---|---|---|---|
| Date | Spot Rate ($US =€1) |
Sale Transaction |
Fair Valuea |
Change in Fair Value |
Intrinsic Value |
Change in Intrinsic Value |
Other Sources of Value |
Change in Other Value |
| Jan. 5, 2019 | 1.28 | $19,500 | $19,500d | |||||
| Mar. 31, 2019 | 1.23 | 44,200 | $24,700 | $32,500b | $32,500 | 11,700 | $(7,800) | |
| Jun. 30, 2019 | 1.19 | $773,500 | 58,500 | 14,300 | 58,500c | 26,000 | (11,700) |
- Derived from an option pricing model such as the Black–Scholes model
- (€650,000 × $1.28:€1) − (€650,000 × $1.23:€1)
- (€650,000 × $1.28:€1) − (€650,000 × $1.19:€1)
- Fair value − intrinsic value (i.e., equals the residual fair value derived from all sources except for intrinsic value)
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