Problem M-3 (LO 3, 4, 7, 8) Impact on earnings of various hedged relation- ships. The chief financial officer (CFO) of Baxter International has employed the use of hedges in a variety of contexts over the first quarter of the current calendar year as follows: Futures ContractThe company hedged against a possible decline in the value of inventory represented by commodity A. At the beginning of February, an April futures contract to sell 10,000 units of commodity A for $3.50 per unit was acquired. It is assumed that the terms of the futures contract and the hedged assets match with respect to delivery location, quantity, and quality. The fair value of the futures contract will be measured by changes in the futures prices over time, and the time value component of the futures contract will be excluded from the assessment of hedge effectiveness. Relevant values are as follows:

REQUIRED:

1. Future contract to sell

2. Future contract to buy

3. Call option

Problem M-3 (LO 3, 4, 7, 8) Impact on earnings of various hedged relation- ships. The chief financial officer (CFO) of Baxter International has employed the use of hedges in a variety of contexts over the first quarter of the current calendar year as follows: Futures ContractThe company hedged against a possible decline in the value of inventory represented by commodity A. At the beginning of February, an April futures contract to sell 10,000 units of commodity A for $3.50 per unit was acquired. It is assumed that the terms of the futures contract and the hedged assets match with respect to delivery location, quantity, and quality. The fair value of the futures contract will be measured by changes in the futures prices over time, and the time value component of the futures contract will be excluded from the assessment of hedge effectiveness. Relevant values are as follows: Number of units per contract.. Spot price per unit ............... Futures price per unit .... February 28 10,000 $3.45 $3.50 March 31 10,000 $3.40 $3.44 Forward Contract-On January 15, the company committed to sell 5,000 units of inven- tory for $90 per unit on March 15. Concerned that selling prices might increase over time, the company entered into a March 15 forward contract to buy 5,000 units of identical inventory at a forward rate of $92 per unit. Changes in the value of the commitment are measured based on the changes in the forward rates over time discounted at 6%. On March 15, the inventory, with a cost of $360,000, was sold, and the forward contract was settled. Relevant values are as shown on page 543