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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
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 Spot Rates Forward Rates October 15 $1. 16:Euro 1 $1.15:Euro 1 December 31 $1. 14:Euro 1 $1. 14:Euro 1 March 31 $1.10:Euro 1 n/a . Execution of the purchase order and forward contract Adjusting entries at December 31 6. Receipt of equipment and payment to equipment supplier on March 31
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