Heinz uses 2000 tons of corn syrup each year as an ingredient in its tomato ketchup products.Heinz is concerned about the increase in prices of corn-based products and purchases a fixed-price contract to buy corn syrup at $10,000 per ton.What is the impact on earnings before taxes as opposed to no hedging if the price of corn is $10,000 per ton over the next year?
A)+$5 million
B)-$5 million
C)$0
D)-$10 million
E)+$10 million

Question

Quizplus · Accepted Answer

If Heinz purchases corn syrup at a fixed price of $10,000 per ton, and the market price remains the same ($10,000 per ton), there is no financial impact from hedging compared to not hedging. The cost remains the same, so the impact on earnings before taxes is $0.

Heinz Uses 2000 Tons of Corn Syrup Each Year as an Ingredient