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5. Fair Value Hedge of a Commitment (10 Points) On October 15, our company has executed a purchase order for new equipment to be purchased

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5. Fair Value Hedge of a Commitment (10 Points) On October 15, our company has executed a purchase order for new equipment to be purchased from a supplier in Italy for a purchase price of 500,000 Euros. The equipment is deliverable on March 31. In order to hedge the commitment to pay 500,000 Euros, we enter into a forward exchange contract on October 15 to receive 500,000 Euros on March 31 at an exchange rate of $1.15. Assume the following exchange rates: Date October 15 December 31 March 31 Spot Rates $1.16:Euro 1 $1.14:Euro 1 $1.10:Euro 1 Forward Rates $1.15:Euro 1 $1.14:Euro 1 n/a Execution of the purchase order and forward contract b. Adjusting entries at December 31 c. Receipt of equipment and payment to equipment supplier on March 31

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