You are a wholesale grocer. You have entered into a contract with the local school district...

 

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You are a wholesale grocer. You have entered into a contract with the local school district to supply 50,000 gallons of milk for their lunch programs each month. The current price for milk is $1.5 dollars per gallon. Your contract specifies a price of $1.5 dollars per gallon, the future price of milk today is $1.6 dollars per gallon (for delivery in any of the next 12 months. The cost of storage is 1% per month and the interest rate is 0.25% a month. 4.A. 2pts. Write a formula for deciding whether to hedge your delivery contract by going long on a forward contract for milk or by holding milk inventory. 4.B.(2pts). For what months do you hedge? 4.C.(2pts) At what forward price would you then buy the contract for the next month? You are a wholesale grocer. You have entered into a contract with the local school district to supply 50,000 gallons of milk for their lunch programs each month. The current price for milk is $1.5 dollars per gallon. Your contract specifies a price of $1.5 dollars per gallon, the future price of milk today is $1.6 dollars per gallon (for delivery in any of the next 12 months. The cost of storage is 1% per month and the interest rate is 0.25% a month. 4.A. 2pts. Write a formula for deciding whether to hedge your delivery contract by going long on a forward contract for milk or by holding milk inventory. 4.B.(2pts). For what months do you hedge? 4.C.(2pts) At what forward price would you then buy the contract for the next month?

Answer rating: 100% (QA)

Deciding to Hedge and Forward Contract Pricing 4A Decision Formula Let S Current spot price of milk ... View the full answer