MNC Corp. (a U.S. based company) sold parts to a South Korea customer on December 1, 2011, with payments of 10 millions South Korea won to be received on March 31, 2012. The following exchange rates apply:
Date: Spot Rate Forward Rate (to march 31, 2012)
December 1, 2011 .0035 .0034
December 31, 2011 .0033 .0032
March 31, 2012 .0038 N/A
MNC's incremental borrowing rate is 12%. The present value factor for three months at an annual interest rate of 12% (1% per month) is .9706.
Assuming that MNC did not enter into a forward contract to sell 10 million South Korean won on December 1, 2011, as a fair value hedge of a foreign currency receivable, what is the net impact on its net income in 2011 resulting from a fluctuation in the value of the won?
A No impact on net income
B 58.80 decrease in net income
C 2,000 decrease in net income
D 1,941.20 increase in net income
This solution provides a brief calculation for the decrease in net income.