Setia Maju Bhd uses titanium in the production of its specialty drivers. Setia Maju Bhd anticipates that it will need to purchase 20,000 kilograms of titanium in October 2020, for clubs that will be shipped in the holiday shopping season. However, if the price of titanium increases, this will increase the cost to produce the clubs, which will result in lower profit margins. To hedge the risk of increased titanium prices, on May 1, 2020, Setia Maju Bhd enters into a titanium futures contract and designates this futures contract as a cash flow hedge of the anticipated titanium purchase. The notional amount of the contract is 20,000 kilograms, and the terms of the contract give Setia Maju Bhd the right and the obligation to purchase titanium at a price of RM50 per kilogram. The price will be good until the contract expires on November 30, 2020. Assume the following data with respect to the price of the titanium inventory purchase. Spot Price for November Delivery Date May 1, 2020 June 30, 2020 September 30, 2020 RM50 per kilogram RM52_per kilogram RM53 per kilogram

Setia Maju Bhd uses titanium in the production of its specialty drivers. Setia Maju Bhd anticipates that it will need to purchase 20,000 kilograms of titanium in October 2020, for clubs that will be shipped in the holiday shopping season. However, if the price of titanium increases, this will increase the cost to produce the clubs, which will result in lower profit margins. To hedge the risk of increased titanium prices, on May 1, 2020, Setia Maju Bhd enters into a titanium futures contract and designates this futures contract as a cash flow hedge of the anticipated titanium purchase. The notional amount of the contract is 20,000 kilograms, and the terms of the contract give Setia Maju Bhd the right and the obligation to purchase titanium at a price of RM50 per kilogram. The price will be good until the contract expires on November 30, 2020. Assume the following data with respect to the price of the titanium inventory purchase. Spot Price for November Delivery Date May 1, 2020 June 30, 2020 September 30, 2020 RM50 per kilogram RM52_per kilogram RM53 per kilogram

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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