Question: Problem 10-7 (LO 5) Hedge a commitment to sell. On February 1, Pettit Corporation committed to sell inventory with a cost of $75,000 to a

Problem 10-7 (LO 5) Hedge a commitment to sell. On February 1, Pettit Corporation committed to sell inventory with a cost of $75,000 to a foreign company for 100,000 FC. Payment for this transaction is to be settled on May 1. In anticipation of this sale, Pettit entered into a 90-day forward contract to sell 100,000 FC on May 1. In assessing the effectiveness of this hedge, Pettit has chosen to exclude the change in the time value of the forward contract from the assessment of hedge effectiveness.

Relevant spot and forward rates are as follows:

February 1 March 1 April 1 May 1 Spot rate . . . . . . . . . . . . . . . $0.90 $0.87 $0.85 $0.81 Forward rate . . . . . . . . . . . . 0.91 0.87 0.83 0.81

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