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