On July 1, 2020, Swan Corp, a publicly traded coffee wholesaler, placed an order with its supplier for five tons of coffee for delivery on November 30, 2020 Payment will also be due on November 30, 2020 at the spot (current market) price on that date On July 1, the spot price for one ton of coffee is $ 3,200, and the future (forward) price for November 30, 2020 delivery is $ 3,100 Swan decided to enter into a forward contract for five tons of coffee at $3,100 per ton for November 30, 2020 delivery Swan designated the contract as a cash flow hedge.

The forward contract calls for a net cash settlement The forward contract was priced so that no payment was required by Swan when it was signed Swan s year end is September 30, 2020 On that date the fair value of the futures contract is ($150) On November 30, 2020, when the spot price was $ 3,159 and the fair value of the futures contract was $295, 

Swan took delivery of the coffee, paid its supplier and settled the forward contract On December 20, 2020, 

Swan sold four tons of coffee from the November delivery delivery to Horton's Ltd for $ 3,660 per ton cash The remaining inventory was unsold at December 31 Assume all prices are in Canadian dollars (CAD)

Instructions 

a) Given the information above, should Bella have hedged this transaction? Why? Would your answer be different if the future price were $ 3,100? 

b) Prepare journal entries for the following dates in 2020: May 1, June 30, September 30 and October 31. Bella is a publicly traded corporation and follows IFRS requirements.

Answer rating: 100% (QA)

aYes Swan should have hedged this transaction because it is exposed to price risk If the future price had been 3100 then Swan would not have been expo... View the full answer