Question
It is now January 15. A large baking products firm is hedging purchases of corn meal. The company buys 40,000 bushels of meal per quarter,
It is now January 15. A large baking products firm is hedging purchases of corn meal. The company buys 40,000 bushels of meal per quarter, and will therefore take delivery in March 15, just as the March corn-futures contract matures. A regression of the price of one bushel of corn meal, Pmeal, on the price of a bushel of corn, Pc, produces the following results:
Pmeal= 2.60 + .83Pc
a.On the basis of this information alone, what position in March corn futures should the company take to hedge its costs? How many contracts should the company enter? Should it be long or short?
Now you learn that the corn meal is used in corn-muffin mix, which is competitively priced,and for which frequent price changes occur. The company sells 950,000 boxes of muffinmix per quarter. You run a regression of the price of a box of muffin mix, Pmix, on the price of a bushel of corn and obtain:
Pmix= 1.65 + .055Pc
b.On the basis of the second regression, what futures position would best hedge revenue?
c.Considering the two regressions together, what futures position would best hedge profits?
d.What about profits beyond this quarter's? How (qualitatively) might the firm hedge its long-run stream of profits?
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