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Sinking Fund and Derivatives

Malolos Agriculture purchased a put option to sell 100,000 bushels of corn on January 1, 2011 for $100 per bushel, paying $200,000 for the option. If the price of corn is $105 per bushel on the expiration date, Malolos will recognize a $200,000 loss on the option. If the price is $90 per bushel, Malolos will recognize a $800,000 gain. Cauayan Corporation purchased a 5-year bond paying 12% interest and entered an interest rate swap to receive floating rates in exchange for the fixed payments. With interest rates rising to 14% by the end of the year, the value of the derivative asset on Cau

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Charice Anne Villamarin
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75 views

Sinking Fund and Derivatives

Malolos Agriculture purchased a put option to sell 100,000 bushels of corn on January 1, 2011 for $100 per bushel, paying $200,000 for the option. If the price of corn is $105 per bushel on the expiration date, Malolos will recognize a $200,000 loss on the option. If the price is $90 per bushel, Malolos will recognize a $800,000 gain. Cauayan Corporation purchased a 5-year bond paying 12% interest and entered an interest rate swap to receive floating rates in exchange for the fixed payments. With interest rates rising to 14% by the end of the year, the value of the derivative asset on Cau

Uploaded by

Charice Anne Villamarin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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PROBLEM 1

February 12 has no entry because money market instrument is reported in cash and cash equivalents.
PROBLEM 2

SAMPLE PROBLEM FOR DERIVATIVES

Malolos Agriculture sells approximately 100,000 bushels of corn each month. On January 1, 2010,
Malolos purchased an option to sell 100,000 bushels of corn on January 1, 2011at P100 each. Malolos
paid P200,000 to purchase this corn put option designated as cash flow hedge.

If the price of the corn on January 1, 2011 is P105 per bushel, Malolos shall recognize a gain or loss on
put option in 2011 at

200,000 loss
If the price of the corn on January 1, 2011 is P90 per bushel, malolos shall recognize a gain or loss on put
option in 2011 at

800,000 gain

On January 1, 2010, Cauayan Corporation purchased a 5 year bonds that has a principal amount of P1,000,000 and
pays annually fixed interest rate of 12% per year. Cauayan Corporation classified the bond as at fair value through
OCI. Current market rate for similar 5 year bond is also 12%. Because the interest rate is fixed, Cauayan Corporation
is exposed to the risk of declines in fair value due to increases in market interest rates, Cauayan enters into an interest
rate swap on January 1, 2010 tpo exchange the fixed interest payment it receives on the bond for floating interest
payments. Cauayan designated and documented the swap as hedging instrument of the bond. On December 31, 2010,
market interest rate is 14%.
The amount to be recognized as derivative asset on December 31, 2010 is

58,000

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