Question
A small aircraft manufacturer is worried about rising costs with plane deliveries in the next year. The company has several contracts to build jet airplanes
A small aircraft manufacturer is worried about rising costs with plane deliveries in the next year. The company has several contracts to build jet airplanes with several of them currently under construction. With contracts already signed and very difficult to break, the CFO is worried that rising costs in the next couple of months might make these projects unprofitable. The company has many suppliers that have been passing on costs increases to the company since raw materials used in the production of jet airplanes have been rising. The CFO is worried about continued rising costs but does not expect costs to get too out of control and only expect a modest increase. Even a modest increase will decrease profitability, so a cost-effective hedge is more appropriate. Your job is to research some of the inputs into the production of jet airplanes and figure out a way to propose a hedge to the board and CEO during next weeks meeting. Requirements 1. You may use any futures contract or futures option contract to hedge the potential cost increases. Max futures or futures option expiration of 6 months from today. 2. Be specific to the contract and contract month and why these were chosen. 3. You may use any futures contract on other exchanges besides the CME if needed. 4. Recommend the best derivative strategy for each commodity. 5. For calculation purposes only, assume that the target notional value for each hedge should be $5 million. Make sure to have the correct number of contracts to hedge the full amount. 6. Make sure to format you answers in a document to present to the board. If you just answer the questions without the proper format, points will be deducted from your grade. 7. Recommend a minimum of 3, maximum of 5, contracts to hedge costs 8. Format your response in a letter to the CFO.
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