In February, Tech Components Inc. (TCI), a manufacturer of specialized electronic components, was negotiating a supply agreement
Question:
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?
Step by Step Answer:
Contemporary Financial Management
ISBN: 978-1337090582
14th edition
Authors: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao