It is February 12, 2024. Long Bay Metal Distributors has just signed a contract to supply...

 

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It is February 12, 2024. Long Bay Metal Distributors has just signed a contract to supply a recreational boat manufacturer with 50 metric tons of aluminum plate in September 2024. The contract with the boat manufacturer has a fixed price for the aluminum plate which would be profitable to the metal distributor at the current level of aluminum prices. However, Long Bay Metal Distributor's managers are concerned that increases in the price of aluminum may increase their costs to the point that the agreement with the boat manufacturer would prove unprofitable. The managers have noticed that aluminum plate product pricing tends to move in nearly perfect positive correlation to the CME aluminum futures price. The managers decide to hedge the firm's output price exposure using the October 2024 aluminum futures contract. They go short two contracts on February 12 (t-1) when the futures price (F₁) is $2,112.50 per metric ton. (Because the futures contract is written on essentially the same underlying asset, we assume a naïve 1:1 hedge ratio is used.) In mid-September, the firm closes out the hedge and purchases the required aluminum in the spot market. At that time, the basis (ba) is $97.55 per metric ton. What is Long Bay Metal (Enter your answer in dollars and cents, ex. "152.37"). Note that this is the TOTAL cost for the entire 50 metric ton purchase. It is February 12, 2024. Long Bay Metal Distributors has just signed a contract to supply a recreational boat manufacturer with 50 metric tons of aluminum plate in September 2024. The contract with the boat manufacturer has a fixed price for the aluminum plate which would be profitable to the metal distributor at the current level of aluminum prices. However, Long Bay Metal Distributor's managers are concerned that increases in the price of aluminum may increase their costs to the point that the agreement with the boat manufacturer would prove unprofitable. The managers have noticed that aluminum plate product pricing tends to move in nearly perfect positive correlation to the CME aluminum futures price. The managers decide to hedge the firm's output price exposure using the October 2024 aluminum futures contract. They go short two contracts on February 12 (t-1) when the futures price (F₁) is $2,112.50 per metric ton. (Because the futures contract is written on essentially the same underlying asset, we assume a naïve 1:1 hedge ratio is used.) In mid-September, the firm closes out the hedge and purchases the required aluminum in the spot market. At that time, the basis (ba) is $97.55 per metric ton. What is Long Bay Metal (Enter your answer in dollars and cents, ex. "152.37"). Note that this is the TOTAL cost for the entire 50 metric ton purchase.

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To calculate the total cost for the entire 50 metric ton purchase of aluminum we need to consi... View the full answer