Futures Contract and Commodity Exchange

4 Improved stock turns: If they is less stock pile in the form of inventory of finished goods, it will automatically help in reducing the cash tied up with that stock. It ensures fewer borrowing from the bank of other financial institutions. With the availabiliy of cash, more money can be spent on producing essential goods.

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

Minimize risks due to uncertain demand. L.L. Bean would be able to manage ordering process and quantities based on actual demand and adjust more effectively.

Based on the 1988 Supreme Court case of Corn Product Refining Co. v. Commissioner (350 U.S. 46; 76 S.Ct. 20; 100 L.Ed. 29), hedging transactions were determined to be used to support business practices of certain commodities. Such hedging transactions are normal for businesses engaged in commodity sales such as coal or corn to protect against market

As a consultant for Thomas Foods and it is my job to develop hedging strategy to mitigate the risks associated with any unexpected increase in price they would have to pay farmers for their harvested crops. It is important to note that risk is an unavoidable fact of business life. Also, the strategies developed to mitigate risk can often determine the success or failure of a business. There are several mechanisms that are used for such transactions that can involve futures contracts, short sells and rate swaps, among other more exotic positions. There is specific set of guidelines that needed to be set as a consultant. My first initial thought will be the risk to be hedged; that is interest rate and commodity price

This causes the price and the quantity move in opposite directions in a supply curve shift. Also, if the quantity supplied decreases at any given price the opposite will happen.

The price of coffee is impacted by several factors. Meteorological events can affect the quality of a harvest or even wipe out entire plantations. The political and economic stability of the coffee-growing regions can have a profound effect on availability, and subsequently price per pound. Coffee is traded on the commodities exchanges

• At the maturity stage, the extra cost, although very small, can be a real disadvantage because during this period, the market becomes very competitive and many players enter the same field causing price to drop. Customers also become more price-sensitive. However, the benefit of better forecasting demands significantly helps lower the level of inventory.

4) The system keeps buffers between successive operations to maintain continuity of production (reducing the variability in demand at various stages).

To create a competitive advantage, a mine has to properly manage its exposure to gold price fluctuations. This is not an easy thing to do since there are so many factors to consider: when, how much, and how to hedge the gold production. Firms in this industry differentiate themselves based on the risk management strategies they implement. Furthermore, mines should also be able to minimize the cost of gold production along with making large sunk costs. Operating in

Second, excess inventory will be reduced on items that have a lower demand. Third, there should be enhanced credibility with customers due to the better availability of product. Forecasting should also benefit scheduling and labor needs for production. Ultimately, there should be an increase in inventory for products with high demand, a decrease in overall inventory, and reduced operating expenses.

From its definition it can be noticed that hedging is a strategy employed by companies in an effort to safeguard their economic position and to prevent the company from the losses which are associated with the unforeseen risks. Companies can hedge against risks which are associated with losses by taking control of their future purchases. The commodity prices vary in different markets and are caused or influenced by different economic factors. Some commodities are very scarce and with the increased depletion subject to the global demand in different foreign markets, the prices are set to be hiked in response to the established demand which positions the companies that use those particular commodities to have cash flow problems.

According to Goel and Gutierrez, they investigated that fluctuating procurement price is one of the causes of inventory risk and through trading appropriate numbers of futures or forward commodity contracts reduces inventory related costs for effective hedging. Hedging and the price discovery functions of futures markets facilitates not only a better inventory management but enhances the efficiency of marketing operations, production and storage.

This method also useful when transactions are not too many and prices of materials are fairly steady.

A part of the money, so gained, can be used for purchasing some more units of the commodity. Therefore, when price falls the amount purchased increases. When price falls, the consumer’s income is in effect reduced and he has to curtail his expenditure on the commodity. So the amount purchased falls.