Hedging Strategies For the following scenarios, describe a hedging strategy usin

Question

Hedging Strategies For the following scenarios, describe a hedging strategy using futures contracts that might be considered.
a. A public utility is concerned about rising costs.

b. A candy manufacturer is concerned about rising costs.

c. A corn farmer fears that this year’s harvest will be at record high levels across the
country.

d. A manufacturer of photographic film is concerned about rising costs.

e. A natural gas producer believes there will be excess supply in the market this year.

f. A bank derives all its income from long-term, fixed-rate residential mortgages.

g. A stock mutual fund invests in large, blue-chip stocks and is concerned about a
decline in the stock market.

h. A U.S. importer of Swiss army knives will pay for its order in six months in Swiss
francs.

i. A U.S. exporter of construction equipment has agreed to sell some cranes to a
German construction firm. The U.S. firm will be paid in euros in three months

Explanation / Answer

Scenario Hedging strategy a. A public utility is concerned about rising costs. They Can enter into a future contract by having a long position. b. A candy manufacturer is concerned about rising costs. They Can enter into a future contract by having a long position in candy. c. A corn farmer fears that this year’s harvest will be at record high levels across the country. They Can enter into a future contract by having a long position in harvest. d. A manufacturer of photographic film is concerned about rising costs. They Can enter into a future contract by having a long position in photographic film. e. A natural gas producer believes there will be excess supply in the market this year. They Can enter into a future contract by having a short position in natural gas. f. A bank derives all its income from long-term, fixed-rate residential mortgages. there is no need of hedging. g. A stock mutual fund invests in large, blue-chip stocks and is concerned about a decline in the stock market. They Can enter into a future contract by having a short position of MF. h. A U.S. importer of Swiss army knives will pay for its order in six months in Swiss francs. They Can enter into a future contract by having a long position of SF. i. A U.S. exporter of construction equipment has agreed to sell some cranes to a German construction firm. The U.S. firm will be paid in euros in three months They Can enter into a future contract by having a short position of Euros.

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