ACG 4201 help A Guide to career/Snaptutorial ACG 4201 help A Guide to career/Snaptutorial | Page 12

Problem M-3
This requires you to analyze the impact on earnings on three hedged
relationships – Futures Contract, Forward Contract, and Option. A
clear understanding of how each of these hedging instruments
“works”. Below are templates and a few of the answers. For example:
For the “Futures Contract To Sell” on March 31 is $600, calculated by
multiplying 10,000 units (number of units per contract) by the
difference between the futures price per unit ($3.50) as of February 28
and the Futures price per unit as of March 31 ($3.44). Note that the
$600 is a gain since the seller can buy the commodity at $3.44 per
unit on March 31 and sells it at a committed price of $3.50 per unit.
However, the net impact of earnings will be the difference between
this gain ($600) and the $500 ([$3.45 - $3.40] x 10,000) decline in the
value of the inventory. Thus, the seller without hedging with the
futures contract, the seller would have lost $500, and had gained $100
by hedging with the futures contract.
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