Foe each of the fair value hedges, determine, by nonth, the change in the value
ID: 2593297 • Letter: F
Question
Foe each of the fair value hedges, determine, by nonth, the change in the value of the respective inventories and the gain or loss on the future contracts.
Problem Fair value hedges using futures. A large corporate farming operation is holding an inventory of corn and wheat and is concerned that excess harvests this season will lower the value of the commodities. In order to hedge against adverse market changes, the corporation acquired the following contracts on June 1: 30 contracts to sell 5,000 bushels of corn in December at a future price of $3.56 per bushel. 30 contracts to sell 5,000 bushels of wheat in December at a future price of $6.35 per bushel. Spot and future prices are as follows: Com Dollars per Bushel Wheat-Dollars per Bushel Spot Price Future Price Spot Price Future Price June 1 June 30 July 31 $3.42 3.41 3.43 $3.56 3.53 3.54 $6.20 6.19 6.175 $6.35 6.33 6.32 For each of the fair value hedges, determine, by month, the change in the value of the respective inventories and the gain or loss on the futures contractsExplanation / Answer
Change in Value of Inventories SL.No Particulars Corn Wheat 1 No of Contracts 30.00 30.00 2 No of Bushell 5,000.00 5,000.00 On 1 June 3 Spot Price 3.42 6.20 4 Value of Inventory(1*2*3) 513,000.00 930,000.00 On 30 June 5 Spot Price 3.41 6.19 6 Value of Inventory(1*2*5) 511,500.00 928,500.00 7 Reduction in value of Inventory (1,500.00) (1,500.00) (4-5) On 31 June 8 Spot Price 3.43 6.18 9 Value of Inventory(1*2*8) 514,500.00 926,250.00 10 Increase /Reduction in value of Inventory 3,000.00 (2,250.00) (6-7) Gain/ loss on Futures SL.No Particulars Corn Wheat 1 No of Contracts 30.00 30.00 2 No of Bushell 5,000.00 5,000.00 On 1 June 3 Future Prices 3.56 6.35 4 Value of Inventory(1*2*3) 534,000.00 952,500.00 On 30 June 5 Future Prices 3.53 6.33 6 Value of Inventory(1*2*5) 529,500.00 949,500.00 7 Loss on Futures (4,500.00) (3,000.00) (4-5) On 31 June 8 Future Prices 3.54 6.32 9 Value of Inventory(1*2*8) 531,000.00 948,000.00 10 Gain/ loss on futures 1,500.00 (1,500.00) (6-7)