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A Consultant For Thomas Foods And It

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Acct 540 Project Week 7
As a consultant for Thomas Foods and it is my job to develop hedging strategy to mitigate the risks associated with any unexpected increase in price they would have to pay farmers for their harvested crops. It is important to note that risk is an unavoidable fact of business life. Also, the strategies developed to mitigate risk can often determine the success or failure of a business. There are several mechanisms that are used for such transactions that can involve futures contracts, short sells and rate swaps, among other more exotic positions. There is specific set of guidelines that needed to be set as a consultant. My first initial thought will be the risk to be hedged; that is interest rate and commodity price …show more content…

For any chosen hedging program, we should be aware of the accounting standards that will govern reporting of those transactions. The summary under FASB 133 says that at the inception of the hedge, an entity that elects to apply hedge accounting is required to establish the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. These methods must be consistent with the entity 's approach to managing risk.
For interest rate hedging strategy, swaps are used to hedge. And most importantly, interest rate swaps are an agreement between two counterparties exchanging one stream of future interest payments for another. Interest rate swaps can exchange a fixed payment for a floating payment or vice versa. We can also hedge against commodity price risk where this involves purchase of a futures contract, that guarantee a particular price at a certain point in time. In this case, the price is guaranteed and no unexpected loss can occur. Also no gain based on favorable price changes can occur as well. We can also hedge against commodity price risk where this involves purchase of a futures contract, that guarantee a particular price at a certain point in time. In this case, the price is guaranteed and no unexpected loss can occur. Also no gain based on favorable price changes can occur as well. Hedging against investment risk means strategically using instruments in the market to

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