CORPORATE FINANCE CUSTOM W/CONNECT >BI
CORPORATE FINANCE CUSTOM W/CONNECT >BI
11th Edition
ISBN: 9781307036633
Author: Ross
Publisher: MCG/CREATE
Question
Chapter 25, Problem 1CQ
Summary Introduction

To explain: The true option about firm’s exposure to the lumber prices.

Hedging:

Hedging refers to that activity which performed by the investor to reduce the risk which would be possibly take place due to adverse movement of price.

Expert Solution & Answer
Check Mark

Answer to Problem 1CQ

If, the futures are sold of lumber by firm it means that lumber is a supplier and would have the right to deliver the lumber. The firm would be able to compensate the losses in the spot market if the price of lumber reduces in the near future.

Explanation of Solution

  • The person who sales the lumber has the right to deliver the lumber at the pre decided price.
  • If in future, the price of the lumber would increase that can create a spot price loss for the company.
Conclusion

Hence, the prices of the lumber in the market can be increased or decrease though the firm needs to perform accordingly.

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