During the third quarter of the current year, Beamer Manufacturing Company invested in derivative instruments for a variety of reasons. The various investments and hedging relationships are as follows:a. Call Option A—This option was purchased on July 10 and provided for the purchase of 10,000 units of commodity A in October at a strike price of $45 per unit. The company designated the option as a hedge of a commitment to sell 10,000 units of commodity A in October at a fixed price of $45 per unit. Information regarding the option and commodity A is as follows: July 10 July 31 August 31 September 30 Spot price Value of option $ 45 2000 $46 12400 $44 1000 $46.50 16000 b. Call Option B—This option provided for the purchase of 10,000 units of commodity B in October at a strike price of $30 per unit. The company designated the option as a hedge of a forecasted purchase of commodity B in October. Information regarding the option and commodity B is as follows: July 1 July 31 August 31 September 30 Spot price Value of option $ 29 1100 $ 29.50 900 $ 29 600 $ 28.75 200 c. Put Option C—This option provided for the sale of 10,000 units of commodity C in September at a strike price of $30 per unit. The company designated the option as a hedge of a forecasted sale of 10,000 units of commodity C on September 10. Information regarding the option and commodity C is as follows: July 1 July 31 August 31 September 10 Spot price Value of option $ 30 500 $29.50 5,600 $ 29 10,200 $028.75 12,600 The company settled the option on September 10 and sold 10,000 units of commodity C at the spot price. The manufacturing cost of the units sold was $20 per unit.d. Futures Contract D—The contract calls for the sale of 10,000 units of commodity D in October at a future price of $10 per unit. The company designated the contract as a hedge on a forecasted sale of commodity D in October. Information regarding the contract and commodity D is as follows: July 1 July 31 August 31 September 10 Spot price Futures price $9.95 9.94 $9.92 9.90 $9.89 9.87 $9.85 9.84 e. Interest Rate Swap—The company has a 12-month note receivable with a face value of $10,000,000 that matures on June 30 of next year. The note calls for interest to be paid at the end of each month based on the LIBOR variable interest rate at the beginning of each month. On July 31, the company entered into an agreement to receive a 7% fixed rate of interest beginning in August in exchange for payment of a variable rate based on LIBOR. The reset date is at the beginning of each month, and net settlement occurs at the end of each month. LIBOR rates and swap values are as follows: July August September LIBOR for month Swap value at end of month 6.8% $17,729 6.8% $24,249 6.7% $21,884 In all of the above cases, the change in the time value of the derivative instrument is excluded from the assessment of hedge effectiveness. Furthermore, the company assesses hedge effectiveness on a continuing basis. Such an assessment at the end of June concluded that call option B was not effective.Prepare a schedule to reflect the effect on current earnings of the above hedging relationships.The schedule should show relevant amounts for each month from July through September.
During the third quarter of the current year, Beamer Manufacturing Company invested in derivative instruments for a variety of reasons. The various investments and hedging relationships are as follows:
a. Call Option A—This option was purchased on July 10 and provided for the purchase of 10,000 units of commodity A in October at a strike price of $45 per unit. The company designated the option as a hedge of a commitment to sell 10,000 units of commodity A in October at a fixed price of $45 per unit. Information regarding the option and commodity A is as follows:
| July 10 | July 31 | August 31 | September 30 | |
|
Spot price Value of option |
$ 45 2000 |
$46 12400 |
$44 1000 |
$46.50 16000 |
b. Call Option B—This option provided for the purchase of 10,000 units of commodity B in October at a strike price of $30 per unit. The company designated the option as a hedge of a
| July 1 | July 31 | August 31 | September 30 | |
|
Spot price Value of option |
$ 29 1100 |
$ 29.50 900 |
$ 29 600 |
$ 28.75 200 |
c. Put Option C—This option provided for the sale of 10,000 units of commodity C in September at a strike price of $30 per unit. The company designated the option as a hedge of a forecasted sale of 10,000 units of commodity C on September 10. Information regarding the option and commodity C is as follows:
| July 1 | July 31 | August 31 | September 10 | |
|
Spot price Value of option |
$ 30 500 |
$29.50 5,600 |
$ 29 10,200 |
$028.75 12,600 |
The company settled the option on September 10 and sold 10,000 units of commodity C at the spot price. The
d. Futures Contract D—The contract calls for the sale of 10,000 units of commodity D in October at a future price of $10 per unit. The company designated the contract as a hedge on a forecasted sale of commodity D in October. Information regarding the contract and commodity D is as follows:
| July 1 | July 31 | August 31 | September 10 | |
|
Spot price Futures price |
$9.95 9.94 |
$9.92 9.90 |
$9.89 9.87 |
$9.85 9.84 |
e. Interest Rate Swap—The company has a 12-month note receivable with a face value of $10,000,000 that matures on June 30 of next year. The note calls for interest to be paid at the end of each month based on the LIBOR variable interest rate at the beginning of each month. On July 31, the company entered into an agreement to receive a 7% fixed rate of interest beginning in August in exchange for payment of a variable rate based on LIBOR.
The reset date is at the beginning of each month, and net settlement occurs at the end of each month. LIBOR rates and swap values are as follows:
| July | August | September | |
|
LIBOR for month Swap value at end of month |
6.8% $17,729 |
6.8% $24,249 |
6.7% $21,884 |
In all of the above cases, the change in the time value of the derivative instrument is excluded from the assessment of hedge effectiveness. Furthermore, the company assesses hedge effectiveness on a continuing basis. Such an assessment at the end of June concluded that call option B was not effective.
Prepare a schedule to reflect the effect on current earnings of the above hedging relationships.
The schedule should show relevant amounts for each month from July through September.
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