Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 25, Problem 1CQ
Summary Introduction
To explain: The true option about firm’s exposure to the lumber prices.
Hedging:
Hedging refers to that activity which performed by the investor to reduce the risk which would be possibly take place due to adverse movement of price.
Expert Solution & Answer
Answer to Problem 1CQ
If, the futures are sold of lumber by firm it means that lumber is a supplier and would have the right to deliver the lumber. The firm would be able to compensate the losses in the spot market if the price of lumber reduces in the near future.
Explanation of Solution
- The person who sales the lumber has the right to deliver the lumber at the pre decided price.
- If in future, the price of the lumber would increase that can create a spot price loss for the company.
Conclusion
Hence, the prices of the lumber in the market can be increased or decrease though the firm needs to perform accordingly.
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Chapter 25 Solutions
Corporate Finance
Ch. 25 - Prob. 1CQCh. 25 - Prob. 2CQCh. 25 - Prob. 3CQCh. 25 - Prob. 4CQCh. 25 - Prob. 5CQCh. 25 - Prob. 6CQCh. 25 - Option Explain why a put option on a bond is...Ch. 25 - Hedging Interest Rates A company has a large bond...Ch. 25 - Prob. 9CQCh. 25 - Prob. 10CQ
Ch. 25 - Prob. 11CQCh. 25 - Prob. 12CQCh. 25 - Prob. 13CQCh. 25 - Prob. 14CQCh. 25 - Hedging Strategies William Santiago is interested...Ch. 25 - Prob. 16CQCh. 25 - What is the monthly mortgage payment on Jerrys...Ch. 25 - Prob. 2MCCh. 25 - Prob. 3MCCh. 25 - Prob. 4MCCh. 25 - Suppose that in the next three months the market...Ch. 25 - Are there any possible risks Jennifer faces in...
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