Next, a small lumber producer in Oregon, USA is expected to produce around 5 million board- foot of lumber sometime around mid-June 2022 and they are concerned that lumber prices will fall before then. They are considering locking in a selling price for their lumber now using CME lumber futures contracts and they have approached you to advise them on the hedge. Assume that today (January 1, 2022) the current spot price of lumber is USD1,188 (per 1,000 board-foot). Also assume that you have estimated the quarterly standard deviation of the lumber futures price changes to be 0.735, the quarterly standard deviation of the spot lumber price changes to be 0.682, and the correlation coefficient between these price changes to be 0.925. (e) Next, assume that the lumber producer is ready to sell the lumber in mid-June. At uis time, the lumber spot price has decreased to USD936 (per 1,000 board-foot) and the lumber futures price for delivery in one month is USD905 (per 1,000 board-foot). Calculate the outcome with and without the hedge. What is the company's effective selling price with and without the hedge? Did the lumber producer benefit from this hedge?
Next, a small lumber producer in Oregon, USA is expected to produce around 5 million board- foot of lumber sometime around mid-June 2022 and they are concerned that lumber prices will fall before then. They are considering locking in a selling price for their lumber now using CME lumber futures contracts and they have approached you to advise them on the hedge. Assume that today (January 1, 2022) the current spot price of lumber is USD1,188 (per 1,000 board-foot). Also assume that you have estimated the quarterly standard deviation of the lumber futures price changes to be 0.735, the quarterly standard deviation of the spot lumber price changes to be 0.682, and the correlation coefficient between these price changes to be 0.925. (e) Next, assume that the lumber producer is ready to sell the lumber in mid-June. At uis time, the lumber spot price has decreased to USD936 (per 1,000 board-foot) and the lumber futures price for delivery in one month is USD905 (per 1,000 board-foot). Calculate the outcome with and without the hedge. What is the company's effective selling price with and without the hedge? Did the lumber producer benefit from this hedge?
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:Next, a small lumber producer in Oregon, USA is expected to produce around 5 million board-
foot of lumber sometime around mid-June 2022 and they are concerned that lumber prices
will fall before then. They are considering locking in a selling price for their lumber now using
CME lumber futures contracts and they have approached you to advise them on the hedge.
Assume that today (January 1, 2022) the current spot price of lumber is USD1,188 (per 1,000
board-foot). Also assume that you have estimated the quarterly standard deviation of the
lumber futures price changes to be 0.735, the quarterly standard deviation of the spot lumber
price changes to be 0.682, and the correlation coefficient between these price changes to be
0.925.
(e) Next, assume that the lumber producer is ready to sell the lumber in mid-June. At uis
time, the lumber spot price has decreased to USD936 (per 1,000 board-foot) and the
lumber futures price for delivery in ane month is USD905 (per 1,000 board-foot). Calculate
the outcome with and without the hedge. What is the company's effective selling price
with and without the hedge? Did the lumber producer benefit from this hedge?
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