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Temple Manufacturing frequently buys palladium from Precious Metals, Inc. Precious Metals requires a firm six-month commitment in order to do business with them. On January 1, 2011, Temple enters into a contract with Precious Metals to purchase 10,000 pounds of palladium at the current forward price of $315 per pound with settlement to occur on June 30, 2011. Temple wants to actually pay the market price for palladium as of June 30. Temple enters into a forward contract to sell 10,000 pounds of palladium at the current forward price of $315 per pound. The firm commitment contract and the forward contract both have zero value at inception. Palladium spot prices and the contract fair values are

Forward Contract Fair Value

Spot Price Price (June 30) Forward Firm Commitment

January 1 $300 $315 -0- -0-

March 31 295 300 $147,100 ($147,100)

June 30 280 N/A 350,000 ( 350,000)

Why did Temple hedge its fixed price contract with Precious Metals? (Be specific)

Did management make a good or bad decision? Explain.

What journal entry should be made on January 1st?

What journal entry should be made on March 31st ?

What journal entry should be made on June 30th?

What price did Temple end up paying for the palladium after accounting for the forward contract? Show how you determined the price.

would this have been a good hedge if the settlement price of the forward contract on June 30 was $300? Explain.

1. An asset manager anticipates the receipt of funds in 200days, which he will use to purchase a particular stock. The stock he had in mind is currently selling for P62.50 and will pay a P0.755 dividend in 50 days and another P0.75 dividend in 140 days. The risk free rate is 4.2%. The manager decides to commit to a future purchase of stock by going long a forward contract on the stock.
   REQUIRED:
   At what price would the manager commit to purchase the stock in 200 days through a forward contract?          (5 marks)
   Suppose the manager enters into the contract at the price you found in Part a. Now, 75 days later, the stock price is P55.75. Determine the value of the forward contract at this point.                       (5 marks)
   It is now the expiration day, and the stock price is P58.50. Determine the value of the forward contract at this time.         (5 marks)