Evaluating a hedge of a firm commitment with a put option. A major cattle feeding operation has entered into a firm commitment to buy 100,000 bushels of corn to be delivered to its feed lot in Kansas....

Evaluating a hedge of a firm commitment with a put option. A major cattle feeding operation has entered into a firm commitment to buy 100,000 bushels of corn to be delivered to its feed lot in Kansas. The corn is expected to be delivered in 90 days. The company is committed to pay $1.50 per bushel. If corn yields are greater than expected, the price of corn could decline and the company would experience higher operating costs than necessary as a result of the commitment.

In order to protect itself against falling corn prices, the company purchased an option to sell corn in 90 days at a strike price of $1.51 per bushel delivered to a facility in Nebraska.

1. Assuming that the company designated the swap as a fair value hedge, identify several critical criteria that would need to be satisfied in order to justify this classification.