On November 1, 2019 Husky owned 1,000,000 barrels of oil that it wants to sell in...

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On November 1, 2019 Husky owned 1,000,000 barrels of oil that it wants to sell in March 2020 for $45 per barrel. Husky acquired the oil for $40 per barrel in September from a local competitor that was going out of business. Husky management would like to hedge against a change in the price of oil so they can remove the risk that future cash flows will be different from the $45,000,000 expected amount. On November 1, 2019 the company enters into a forward contract to sell 1,000,000 barrels of oil in March 2020 for a price of $45 per barrel (the right and obligation to deliver). Assume the forward contract has no value at inception. The company's managers designate this as a cash flow hedge, and it is expected to be highly effective. (a) Assume that on December 31, 2019 the forward price for March 2020 delivery of oil has increased to $46.50 per barrel. Since Husky is a calendar year-end firm, how would Husky reflect the change in value of the forward contract in their financial statements? (3 pts) (b) Assume that Husky sells the oil in March 2020 for $44.00 per barrel. Show the journal entries required to record both the sale of the oil and the settlement of the forward position (net settlement) in March 2020. Assume net settlement on the forward contract. (12 pts) On November 1, 2019 Husky owned 1,000,000 barrels of oil that it wants to sell in March 2020 for $45 per barrel. Husky acquired the oil for $40 per barrel in September from a local competitor that was going out of business. Husky management would like to hedge against a change in the price of oil so they can remove the risk that future cash flows will be different from the $45,000,000 expected amount. On November 1, 2019 the company enters into a forward contract to sell 1,000,000 barrels of oil in March 2020 for a price of $45 per barrel (the right and obligation to deliver). Assume the forward contract has no value at inception. The company's managers designate this as a cash flow hedge, and it is expected to be highly effective. (a) Assume that on December 31, 2019 the forward price for March 2020 delivery of oil has increased to $46.50 per barrel. Since Husky is a calendar year-end firm, how would Husky reflect the change in value of the forward contract in their financial statements? (3 pts) (b) Assume that Husky sells the oil in March 2020 for $44.00 per barrel. Show the journal entries required to record both the sale of the oil and the settlement of the forward position (net settlement) in March 2020. Assume net settlement on the forward contract. (12 pts)

Answer rating: 100% (QA)

Solution a forward price Derivative assets of oil inventory 404650 100000... View the full answer