On November 1, Year 1, Black Lion Company forecasts the purchase of raw materials from an Argentinian supplier on February 1, Year 2, at a price of 200,000 Argentinian pesos. On November 1, Year 1, Black Lion pays $1,200 for a three-month call option on 200,000 Argentinian pesos with a strike price of $0.35 per peso. The option is properly designated as a cash flow hedge of a forecasted foreign currency transaction. On December 31, Year 1, the option has a fair value of $900. The following spot exchange rates apply:
Date U.S. Dollar per Argentinian Peso
November 1, Year 1 $0.35
December 31, Year 1 0.30
February 1, Year 2 0.36
1.What is the net impact on Black Lion Company's Year 1 net income as a result of this hedge of a forecasted foreign currency purchase?
2.What is the net impact on Black Lion Company's Year 2 net income as a result of this hedge of a forecast foreign currency purchase? Assume that the raw materials are consumed and become a part of cost of goods sold in Year 2.