Economics of Hedging with Futures; Propriety of Hedge Accounting McVeigh Company buys 100,000 units of commodity futures at $5.50 per unit to cover a firm commitment to deliver 100,000 units (which McVeigh does not own) to a customer at a fixed price. Spot and futures prices for this commodity are equal and fluctuate between $4 and $6 per unit.
Required
a. Use calculations to show that, regardless of whether McVeigh eventually purchases the commodity for as little as $4 or as much as $6, hedging with futures fixes the net cost to McVeigh at $5.50 per unit.
b. Suppose McVeigh grows the commodity on its own farms and will not need to purchase it on the spot market. Explain whether ASC Topic 815 permits hedge accounting treatment for the 100,000 units of commodity futures purchased by McVeigh.