On 1^st May, 2007, Mosby Company received an order to trade a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was payment and shipped was received on 1^st March, 2008. On 1^st May, 2007, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on 1^st March, 2008 at a price of $190,000. Mosby correctly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on 31^st December, 2007. The subsequent spot exchange rates apply:

 Date                                  Spot rate

May 1, 2007                        $0.095

Dec 31,2007                         $0.094

March 1, 2008                      $0.089

Mosby's incremental borrowing rate is 12 % and the present value factor for two months at a 12 % annual rate is .9803.

Evaluate the net impact on Mosby's 2007 income as a result of this fair value hedge of a firm commitment?

Determine the net impact on Mosby's 2008 income as a result of this fair value hedge of a firm commitment?

Compute the net increase or decrease in cash flow from having bought the foreign currency option to hedge this exposure to foreign exchange risk?