properly designated the option as a fair value hedge of the Australian dollar firm commitment. The option’s time value is excluded in assessing hedge effectiveness, and the change in time value is recognized in net income over the life of the option. The option cost $2,000 and had a fair value of $2,300 on December 31, 2020. The fair value of the firm commitment was measured by referring to changes in the spot rate (discounting to present value is ignored). The following spot exchange rates apply: Date U.S. Dollar per Australian Dollar (AUD) September 1, 2020 $ 0.80 December 31, 2020 0.79 March 1, 2021 0.77
On September 1, 2020, Stone Company received an order to sell a machine to a customer in Australia at a price of 100,000 Australian dollars. Stone shipped the machine and received payment on March 1, 2021. On September 1, 2020, Stone purchased a put option giving it the right to sell 100,000 Australian dollars on March 1, 2021, at a price of $80,000. Stone properly designated the option as a fair value hedge of the Australian dollar firm commitment. The option’s time value is excluded in assessing hedge effectiveness, and the change in time value is recognized in net income over the life of the option. The option cost $2,000 and had a fair value of $2,300 on December 31, 2020. The fair value of the firm commitment was measured by referring to changes in the spot rate (discounting to present value is ignored). The following spot exchange rates apply:
| Date | U.S. Dollar per Australian Dollar (AUD) |
||
| September 1, 2020 | $ | 0.80 | |
| December 31, 2020 | 0.79 | ||
| March 1, 2021 | 0.77 | ||
What was the net increase or decrease in
Multiple Choice
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$3,000 increase in cash flow
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$0
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$1,500 decrease in cash flow
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$1,000 increase in cash flow
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