Whitnall Limited lost $150 on a hedging instrument and had a corresponding gain on the hedged item of $100. The effectiveness range for the associated transactions is:
A) 100% - 150%;
B) 20% - 30%;
C) 0% - 15%;
D) 66% - 150%.

Question

Quizplus · Accepted Answer

The effectiveness of a hedging instrument is determined by comparing the gain or loss on the hedged item to the gain or loss on the hedging instrument. In this case, the gain on the hedged item is $100, and the loss on the hedging instrument is $150. The effectiveness can be calculated as the gain on the hedged item divided by the loss on the hedging instrument, which is $100/$150 = 66.67%. Therefore, the effectiveness range starts at 66%. Since the question does not specify an upper limit to effectiveness but provides options, the range extending to 150% is the most appropriate choice given the options, indicating that the hedging could be up to 150% effective in an ideal scenario.

Whitnall Limited Lost $150 on a Hedging Instrument and Had