Ms. Kendall is the chief financial officer for Cincinnati Developers. In January, she estimates that the company will need to purchase 6,000,000 square feet of plywood in June to meet its material needs on one of its office construction jobs. Ms. Hunter is confident that plywood prices will be decreasing in the future but does not want to assume the price risk if plywood prices were to increase. Suppose there is a June plywood futures call with X = $0.20/sq. ft. (contract size is 5,000 square feet), selling at C = $0.02, and expiring at the same time as the June underlying plywood futures contract. Explain how Ms. Kendall could cap the company's June plywood costs with a position in the June plywood futures call. Evaluate the cap by showing in a table Ms. Kendall's hedged costs at the plywood futures option's expiration date by buying the plywood on the spot market and closing the futures call options at their intrinsic value. Evaluate at possible spot prices of 0.12/sq. ft., 0.14/sq. ft., 0.16/sq. ft., 0.18/sq. ft., 0.20/sq. ft., 0.22/sq. ft ., 0.24/sq. ft., and 0.26/sq. ft..
Ms. Kendall is the chief financial officer for Cincinnati Developers. In January, she estimates that the company will need to purchase 6,000,000 square feet of plywood in June to meet its material needs on one of its office construction jobs. Ms. Hunter is confident that plywood prices will be decreasing in the future but does not want to assume the price risk if plywood prices were to increase. Suppose there is a June plywood futures call with X = $0.20/sq. ft. (contract size is 5,000 square feet), selling at C = $0.02, and expiring at the same time as the June underlying plywood futures contract. Explain how Ms. Kendall could cap the company's June plywood costs with a position in the June plywood futures call. Evaluate the cap by showing in a table Ms. Kendall's hedged costs at the plywood futures option's expiration date by buying the plywood on the spot market and closing the futures call options at their intrinsic value. Evaluate at possible spot prices of 0.12/sq. ft., 0.14/sq. ft., 0.16/sq. ft., 0.18/sq. ft., 0.20/sq. ft., 0.22/sq. ft ., 0.24/sq. ft., and 0.26/sq. ft..
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Ms. Kendall is the chief financial officer for Cincinnati Developers. In January, she estimates that the company will need
to purchase 6,000,000 square feet of plywood in June to meet its material needs on one of its office construction jobs.
Ms. Hunter is confident that plywood prices will be decreasing in the future but does not want to assume the price risk if
plywood prices were to increase. Suppose there is a June plywood futures call with X = $0.20/sq. ft. (contract size is
5,000 square feet), selling at C = $0.02, and expiring at the same time as the June underlying plywood futures
contract. Explain how Ms. Kendall could cap the company's June plywood costs with a position in the June plywood
futures call. Evaluate the cap by showing in a table Ms. Kendall's hedged costs at the plywood futures option's
expiration date by buying the plywood on the spot market and closing the futures call options at their intrinsic value.
Evaluate at possible spot prices of 0.12/sq. ft., 0.14/sq. ft., 0.16/sq. ft., 0.18/sq. ft., 0.20/sq. ft., 0.22/sq. ft
., 0.24/sq. ft., and 0.26/sq. ft..
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