Question

You observe that a company has entered into futures contracts where the company is obligated to sell more of the commodity it produces than the volume they actually expect to produce.   How might this be justified?

What if instead you observed that a company had entered into futures contracts to sell less than the volume they expect to produce, say they have locked in a price for only 50% of anticipated production? How might this be justified?

Solution Preview

This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.

Futures contracts are used to hedge the risk that the prices of the commodity can move in the adverse direction. They are also used when traders speculate that markets are bullish or bearish. Moreover, the magnitude in which the futures price and the spot price move may also not be the same. This is because of the presence of market irregularities. Prior to expiry of the futures contract, there is the possibility that if the spot price changes by 10%, the futures price may change by less than 10% or more than 10%. ...

This is only a preview of the solution. Please use the purchase button to see the entire solution

$10.00

or free if you
register a new account!

Related Homework Solutions

Finance Questions
Homework Solution
$75.00
Business
Finance
Bond
Price
Stock
Market
Rate
Sale
Firm
Bankruptcy
Risk
Liquidation
Finance Questions
Homework Solution
$73.00
Business
Finance
Export
Firm
Payment
Spot Rates
VaR
Diversification
CaFlow
Zen
Dollar
Interest Rate
Profit
Project
NPV
Interest Rate
Hedge
WACC
Finance Questions
Homework Solution
$188.00
Finance
Interest
Rate
Nominal
Inflation
Price
Cash Flow
Cost
Capital
Coupon
Bond
Maturity
Put
Investment
Stock
Portfolio
Risk
Sharpe Ratio
Dividend
Share
EPS
Benefit Pension
Deviation
Asset
Recession
PA
PL
Insurance
WACC
Tax
Finance Questions
Homework Solution
$68.00
Business
Finance
Budget
Justification
Cutbacks
Cost
Benefit
Analysis
Life
Cycle
Costing
Get help from a qualified tutor
Live Chats