January 15 January 31 February 28 March 15 Number of units per contract. Spot price per unit. Forward rate per unit. 5,000 $90.00 $92.00 5,000 $90.20 $91.50 5,000 $90.50 $91.20 5,000 $90.60 $90.60 Option-In January, the company forecasted the purchase of 100,000 units of commodity B with delivery in February. Upon receipt, the commodity was processed further and sold for $12 per unit on March 17. On January 15, the company purchased a February 20 call option for 100,000 units of commodity B at a strike price of $8 per unit. Changes in the time value of the option are excluded from the assessment of hedge effectiveness. Relevant values are as follows: January 15 January 31 February 20 March 17 Number of units per option Spot price per unit.. Strike price per unit Fair value of option 100,000 $8.05 $8.00 $6,000 100,000 $8.02 $8.00 $2,400 100,000 $7.95 $8.00 $- Processing costs per unit $1.10
The chief financial officer (CFO) of Baxter International has employed the use of hedges in a variety of contexts over the first quarter of the current calendar year as follows:
Futures Contract—The company hedged against a possible decline in the value of inventory represented by commodity A. At the beginning of February, an April futures contract to sell 10,000 units of commodity A for $3.50 per unit was acquired. It is assumed that the terms of the futures contract and the hedged assets match with respect to delivery location, quantity, and quality. The fair value of the futures contract will be measured by changes in the futures prices over time, and the time value component of the futures contract will be excluded from the assessment of hedge effectiveness. Relevant values are as follows:
February 28 March 31
Number of units per contract . . . . . . . . . . . .10,000 10,000
Spot price per unit . . . . . . . . . . . . . . . . . . . . . . $3.45 $3.40
Futures price per unit . . . . . . . . . . . . . . . . . . . . $3.50 $3.44
Forward Contract—On January 15, the company committed to sell 5,000 units of inventory for $90 per unit on March 15. Concerned that selling prices might increase over time, the company entered into a March 15 forward contract to buy 5,000 units of identical inventory at a forward rate of $92 per unit. Changes in the value of the commitment are measured based on the changes in the forward rates over time discounted at 6%. On March 15, the inventory, with a cost of $360,000, was sold, and the forward contract was settled. Relevant values are as attached.
For each of the above hedged events and the related hedging instruments, prepare a schedule to reflect the effect on earnings for each of the months of January through March of the current year. Clearly identify each component account impacting earnings.
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