In February, Global Photo Company, a major competitor in the photographic paper business, was negotiating a supply agreement with WorldMart; the agreement calls for the delivery of a large quantity of photographic paper in 6 months. WorldMart is a very tough negotiator, and the profit margin on this deal is quite thin. One of the key inputs into the making of photographic paper is silver. The current spot price of silver is $6.60 per troy ounce. The 6-month futures price for silver is $6.67.
a. What silver price should Global Photo use as it establishes a price to quote to WorldMart—the current price or the 6-month futures price?
b. Set up a hedge using the futures market for silver that will protect Global against increases in the price of silver over the coming 6 months.
c. How could Global use options to hedge this risk? Which type of options should be used—puts or calls?