Ms. Hunter is the chief financial officer for Atlanta Developers. In January, she estimates that the...

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Finance

Ms. Hunter is the chief financial officer for AtlantaDevelopers. In January, she estimates that the company will need topurchase 300,000 square feet of plywood in June to meet itsmaterial needs on one of its office construction jobs.
a. Suppose there is a June plywood contract trading at f0 =$0.20/sq. ft. (contract size is 5,000 square feet). Explain how Ms.Hunter could hedge the company’s June plywood costs with a positionin the June plywood contract.
b. Show in a table Ms. Hunter’s net costs at the futures’expiration date of buying plywood on the spot market at possiblespot prices of 0.18/sq. ft., 0.20/sq. ft., 0.22/sq. ft., and0.24/sq. ft. and closing the futures position. Assume no quality,quantity, and timing risk.
c. Define the three types of hedging risk and give an example ofeach in the context of this problem.
d. How much cash or risk?free securities would Ms. Hunter haveto deposit to satisfy an initial margin requirement of 5%?

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aFutures price refers to the price of financialor consumption asset which is computed as taking base of the spotprice of such asset as well as taking into account of the othercosts Future price shall be computed by taking interest rate intoaccount for the maturity period given in the case If the computedfuture price is not equal to the actual price in the market thenthere is See Answer

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Transcribed Image Text

Ms. Hunter is the chief financial officer for AtlantaDevelopers. In January, she estimates that the company will need topurchase 300,000 square feet of plywood in June to meet itsmaterial needs on one of its office construction jobs.a. Suppose there is a June plywood contract trading at f0 =$0.20/sq. ft. (contract size is 5,000 square feet). Explain how Ms.Hunter could hedge the company’s June plywood costs with a positionin the June plywood contract.b. Show in a table Ms. Hunter’s net costs at the futures’expiration date of buying plywood on the spot market at possiblespot prices of 0.18/sq. ft., 0.20/sq. ft., 0.22/sq. ft., and0.24/sq. ft. and closing the futures position. Assume no quality,quantity, and timing risk.c. Define the three types of hedging risk and give an example ofeach in the context of this problem.d. How much cash or risk?free securities would Ms. Hunter haveto deposit to satisfy an initial margin requirement of 5%?