Treetoo Limited wishes to buy 10,000 shares of YCo, a publicly-traded company. Treetoo enters into a contract, through a broker, to buy the shares in 40 days' time, at a price of $3 per share, the current fair value. The broker requires a 10% margin to be maintained at all times. After 10 days, at the fiscal year-end, the price of the YCo shares is $4 per share, and is $4.50 per share at the end of 40 days. At that time, the shares are purchased and the contract is closed out.
Required:
Is this a forward contract or a futures contract? Explain.
What risk is the company hedging?
Prepare journal entries to record the inception of the contract, the change in its fair value at year-end and the additional margin payment, and its maturity.