On June 1, 2020, Munchkin Corp. received an order for finished goods from a Turkish...
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On June 1, 2020, Munchkin Corp. received an order for finished goods from a Turkish customer at a price of 500,000 Turkish lira with a delivery date of July 31, 2020. On June 1, when the U.S. dollarTurkish lira spot rate is $0.230, Munchkin Corp. entered into a two-month forward contract to sell 500,000 lira at a forward rate of $0.240 per lira. Munchkin designates the forward contract as a fair value hedge of the firm commitment to receive lira. The fair value of the firm commitment is measured by referring to changes in the lira forward rate, so forward points must be included in assessing hedge effectiveness of the forward contract. Munchkin delivers the goods and receives payment on July 31, 2020, when the U.S. dollarTurkish lira spot rate is $0.236. On June 30, 2020, the Turkish lira spot rate is $0.246, and the forward contract has a fair value of $2,400.
What is Munchkins net increase or decrease in cash flow from having entered into this forward contract hedge?
Multiple Choice
$1,000 increase in cash flow
$1,500 decrease in cash flow
$2,000 increase in cash flow
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