Question

Twins Construction Company (TCC) regularly purchases lumber as part of its operations.  TCC is concerned that rising input prices will adversely affect its profitability.  Consequently, TCC decides to hedge the commodity price risk with lumber futures contracts.

Show the results of TCC’s position if it contracts to buy 990,000 board feet of lumber in March 2020.  Assume the futures price of lumber either rises by 17% or falls by 11% between now and the maturity date of the contract in March.  Make sure you show all calculations, including initial positions and including gain or loss in the futures market.

Discuss how the use of futures contracts contributes to the success of a firm such as Kellogg or Exxon Mobil.  

Answer 1