TDX Inc. is a distributor of metals throughout the southeastern United States. The company has an inventory of copper located in North Carolina and is concerned that it will decrease in value because of a reduction in manufacturing in the region. On November 15, 2010, the company has decided to hedge against price changes on this inventory by purchasing 15 futures contracts to sell copper in February 2011 with delivery in Charlotte, NC.
In addition, the company's inventory of silver has been significantly reduced because of the opening of a large semiconductor company in the area. TDX anticipates that silver prices in this area will be increasing and that inventory costs will increase. To hedge against rising silver prices, TDX has decided to hedge forecasted March 2011 purchases of silver by acquiring seven futures contracts to buy silver in October with delivery in Charlotte.
TDX also committed to sell 25,000 troy ounces of silver to a South Carolina customer for $20.25 per troy ounce with delivery in March. In response to this commitment and the likelihood of rising silver prices in this region, TDX purchased five March futures contracts.
All contracts were purchased on November 15, and the price information regarding the contracts is as follows:
November 15, 2010 December 31, 2010 February 1, 2011
February Copper contracts:
Number of 25,000 pound contracts 15
Spot price per pound $3.25 $3.21 $3.29
Future price per pound $3.27 $3.23 N/A
March Silver contracts:
Number of 5,000 troy ounce contracts 12
Spot price per troy ounce $18.15 $18.55 $19.40
Future price per troy ounce $18.75 $19.78 $20.10
TDX needs to prepare financial statements for the fiscal year ending December 31, 2010. Identify the income statement and balance sheet accounts that would be affected by the above contracts and indicate the change in their values. In addition, answer the following questions:
Which of the above transactions qualifies as a cash-flow hedge? Explain.
Which of the above transactions qualifies as a fair-value hedge? Explain.
What are the main disclosures that would need to be recorded for each transaction?