1. Which of the following qualifies as a hedged item?
a. A company’s work-in-process inventory of unfinished washers, dryers, and refrigerators.
b. Credit card receivables at JCPenney.
c. Bushels of corn owned by the Farmers’ Cooperative.
d. Salaries payable to employees of Ford Motor Company.
e. A three-year note issued by General Motors and payable in U.S. dollars.
f. A three-year note issued by Chrysler and payable in euros.
2. Which of the following qualifies as a hedging instrument?
a. An electricity futures contract purchased by Alliant Energy, an electrical power company.
b. A crop insurance contract purchased by Farmers’ Cooperative that pays the co-op for crop losses from drought or flood.
c. An option to buy shares of common stock in Ford Motor Company.
d. An option to sell shares of common stock in General Motors.
e. A four-year lease for office space in downtown Toronto.
3. Which of the following qualifies as an eligible risk for hedge accounting?
a. Alliant Energy’s risk that summer demand for electricity may exceed the company’s power-generating capacity.
b. Ford Motor Company’s risk that not enough steel will be available in six months when the company must purchase steel to produce a new sports utility vehicle.
c. The risk to American Express that its members won’t pay their credit card bills.
d. The risk to Farmers’ Cooperative that corn mold will destroy its inventory of corn held in silos for sale next year.
e. The possibility of changes in the exchange rate of U.S. dollars for Mexican pesos for Coca-Cola Company, which has a major foreign investment in Mexico.
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