Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Pear, Inc. is a manufacturer that is heavily dependent on plastic parts shipped from Malaysia. Pear wants to hedge its exposure to plastic price shocks

Pear, Inc. is a manufacturer that is heavily dependent on plastic parts shipped from Malaysia. Pear wants to hedge its exposure to plastic price shocks over the next 6 months. Futures contracts, however, are not readily available for plastic. After some research, Pear identifies futures contracts on other commodities whose prices are closely correlated to plastic prices. Futures on Commodity A have a correlation of 0.70 with the price of plastic, and futures on Commodity B have a correlation of 0.80. The price of plastic Futures on both Commodity A and Commodity B are available with 6-month and 9-month expiration. Ignoring liquidity considerations, which contract would be the best to minimize basis risk? (a) Futures on Commodity A with 6 months to expiration (b) Futures on Commodity B with 6 months to expiration (c) Futures on Commodity A with 9 months to expiration (d) Futures on Commodity B with 9 months to expiration

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Technical Analysis Of Stock Trends

Authors: Robert D. Edwards, John Magee, W.H.C. Bassetti

10th Edition

1439898189, 978-1439898185

More Books

Students also viewed these Finance questions

Question

=+7. What is the big message you want them to know?

Answered: 1 week ago