Berjaya Mining Bhd (BMB) is one of the main producers of tin in Malaysia. On 1 August 2020, it had 10 tons of tin inventory, carried at cost of RM35,100 per ton and planned to sell the tin inventory on 30 September 2020. As the mining industry had been experiencing a decline due to falling demand and low prices, BMB decided to hedge the risk of decreased tin prices. On 1 August 2020, it entered into a forward contract to sell 10 tons of tin at a price of RM65,150 per ton. The maturity of the forward contract was 30 September 2020. On 30 September 2020, BMB settled the forward contract and sold 10 tons of tin inventory at the price of RM64,900 per ton. The prices of tin during the hedging period were as follows: Date Spot price per ton Forward price per ton maturing on 30 September 2020 1 August 2020 RM66,400 RM65,150 31 August 2020 RM64,200 RM63,940 30 September 2020 RM64,900 RM64,900 REQUIRED: (Ignore time value of money) (a) Prepare the journal entries on 31 August 2020 and 30 September 2020 with regard to the hedging instrument and the sale of tin inventory in accordance with the fair value hedge method. (b) Explain the difference between an option and a forward contract.
Berjaya Mining Bhd (BMB) is one of the main producers of tin in Malaysia. On 1 August 2020, it had 10 tons of tin inventory, carried at cost of RM35,100 per ton and planned to sell the tin inventory on 30 September 2020. As the mining industry had been experiencing a decline due to falling demand and low prices, BMB decided to hedge the risk of decreased tin prices. On 1 August 2020, it entered into a forward contract to sell 10 tons of tin at a price of RM65,150 per ton. The maturity of the forward contract was 30 September 2020. On 30 September 2020, BMB settled the forward contract and sold 10 tons of tin inventory at the price of RM64,900 per ton.
The prices of tin during the hedging period were as follows:
|
Date |
|
Spot price per ton
|
|
Forward price per ton maturing on 30 September 2020 |
|
1 August 2020 |
|
RM66,400 |
|
RM65,150 |
|
31 August 2020 |
|
RM64,200 |
|
RM63,940 |
|
30 September 2020 |
|
RM64,900 |
|
RM64,900 |
REQUIRED:
(Ignore time value of money)
(a) Prepare the
(b) Explain the difference between an option and a forward contract.
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