Reference no: EM133046644

Question - Impact on earnings of an option and an interest rate swap. Millikin Corporation decided to hedge two transactions. The first transaction is a forecasted transaction to buy 500 tons of inventory in60 days. The company was concerned that selling prices might increase, and it acquired a 60-day option to buy inventory at a price of $1,200 per ton. Upon acquiring the option, the companypaid a premium of $10 per ton when the spot price was $1,201. At the end of 30 days, the optionhad a value of $19 per ton and a current spot price of $1,214 per ton. Upon expiration of the option, the spot price was $1,216 per ton.

In another transaction, the company borrowed $3,000,000 at a fixed rate of 8%; after three months, the company became concerned that variable rates would be lower than 8%. In response, the company entered into an interest rate swap whereby it paid variable rates to a counterparty in exchange for a fixed rate of 8%. The reset rate for the first 30 days of the swap was 8.1% and was 7.8% for the second 30 days of the swap. The fair value of the swap was$3,000 after the first 30 days and $3,300 after 60 days.

Determine the impact on earnings of the above hedges for the first and second 30-day period.