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In February, Tech Components Inc. (TCI), a manufacturer of specialized electronic components, was negotiating a supply agreement with a major

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In February, Tech Components Inc. (TCI), a manufacturer of specialized electronic components, was negotiating a supply agreement with a major auto manufacturer to supply specialized electronic components for delivery in 6 months. One of the key inputs into the making these specialized components is silver. The current spot price of silver is $25.15 per troy ounce. The 6-month futures price for silver is $26.90. 

a. What silver price should TCI use as it establishes a price to quote to the auto manufacturer the current price or the 6-month futures price?
b. Set up a hedge using the futures market for silver that will protect TCI against increases in the price of silver over the coming 6 months.
c. How could TCI use options to hedge this risk? Which type of options should be used puts or calls?

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a It should use the 6 month futures price of 26 90 because this is the price …View the full answer


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Related Book For  answer-question
Contemporary Financial Management

Contemporary Financial Management

ISBN: 978-1337090582

14th edition

Authors: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao

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Question Details
Chapter # 21
Section: Exercise Questions
Problem: 9
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Question Posted: May 29, 2018 09:10:41
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