Exercise $5($LO $3,6)$ Hedging a commitment with an option. Wellington Manufactur$-$

ing manufactures industrial ovens used primarily in the process of coating or painting metals.

The ovens are sold throughout the world, and units are manufactured to customers' specifica$-$

tions. On June $15,$ the company committed to sell two ovens to a major transnational custo$-$

mer. One of the ovens has a selling price of $$549,600$ and is to be paid for with foreign

currency A $($FCA$).$ The other unit has a selling price of $$297,975$ and is to be paid for with for$-$

eign currency $B(FCB).$ Both units were shipped, FOB shipping point, on September $15,$ and

payment is due within $30$ days of shipment. In order to hedge against exchange rate risks, Well$-$

ington acquired two put options on June $15$ with notional amounts equal to the respective for$-$

eign currency selling prices. The options expire on October $15,$ and customer remittances are

also received on October $15.$ Relevant information concerning the options and exchange rates

is as shown:

Assuming that the time value of the options is excluded from the determination of hedge

effectiveness, determine the gain or loss to be recognized on each of the commitments. The

firm commitment is measured based on changes in the spot rate over time.

Assuming that the costs of the FCA unit and the FCB unit are $$440,000$ and $$235,000,$

respectively, calculate the gross profit margin on each of the units that would have been

experienced with and without the hedge.