(Hedging commodity price risk) Minelli Enterpises uses large amounts of copper i
ID: 1175127 • Letter: #
Question
(Hedging commodity price risk) Minelli Enterpises uses large amounts of copper in the manufacture of ceiling fans. The firm has been very concerned about the detrimental impact of rising copper prices on its earnings and has decided to hedge the price risk associated with its next quarterly purchase of copper. The current market price of copper is $3.00 per pound and Minelli's management wants to lock in this price. How can Minelli ensure that it will pay no more than $3 per pound for copper using a forward contract? Select the best choice below O A. Minelli can take a long position in a torward contract for copper, with a delivery date in one month, and a delivery price ot $3Mb. The tutures exchange wouid find a counterpart to take the other side of the contract O B. Minelli can take a short position in a forward contract for copper, with a delivery date in one month, and a delivery price of $3Mb. To complete this transaction, Minelli must find a counterpart to take the other side of the contract O C. Minelli might also see if there is an exchange-traded futures contract that would serve its purpose. This can be easily done without compromising any desired contract elements or changing risk. O D. Minelli can take a long position in a torward contract for copper, with a delvery date in one month, and a delivery price of s3Mb. To complete this transaction, Minelli must find a counterpart to take the other side of the contract.Explanation / Answer
As given in question that we have to go for forward contract only and since we have to buy the copper in month time period, therefore we have to go long on forward and hence, we are left with option A and option D. And since forward contract does not take place via an exchange, rather it takes place in between two individual parties, Option D seems to be most suitable among the given options.
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