Zeta, an automotive battery manufacturer, uses Zinc as a manufacturing input. Zinc costs presently Rs 275 per kg and Zeta uses around 20 metric tonnes of zinc per month. Concerned about the volatility in zinc prices, the manufacturer is considering the following alternatives:

Not hedging the zinc price risk

Buying and keeping inventory of zinc

Using derivative contracts (forwards, futures, and options)

a. What positions Zeta should take in each derivative contract (forwards, futures, and options)? (2 marks)

b. What are the comparative advantages and disadvantages of using each of the derivative contracts considering the alternatives?

Answer rating: 100% (QA)

a The positions Zeta should take in each derivative contract are as follows Forwards Zeta can enter into a forward contract to buy zinc at a predeterm... View the full answer