Question

In: Finance

Suppose you are Chief Financial Officer at Beazley Confectionery, Inc. and you purchase a large quantity...

  1. Suppose you are Chief Financial Officer at Beazley Confectionery, Inc. and you purchase a large quantity of cocoa each month. You are concerned about the price of cocoa one month from now. You want to guarantee that you will not pay more than $0.80 per pound for forty-five thousand pounds. You do not want to pay for insurance, but you do want to lock in a price of $0.80 per pound for forty-five thousand pounds.
  1. Show the economics of a futures transaction for spot prices on delivery date of $0.70, $0.80, and $0.95.
  2. What is the variability of Beazley’s total outlays under the futures contract?
  3. If at the time of delivery, cocoa is $0.70 per pound, should you have foregone entering into the futures contract? Why or why not?

Solutions

Expert Solution

The spot price is the current price in the marketplace at which a given asset—such as a security, commodity, or currency—can be bought or sold for immediate delivery. Whereas, a futures price is an agreed upon price for future delivery of the asset.

In case of Beazley Confectionery its CFO gets into a future contract for Cocoa per month at $0.80 per pound for 45000 pound of cocoa.

a) The economies of future transaction when the spot price on the delivery date is

  • $0.70 :- Realized saving/loss on future delivery on this day = (Spot - Future)* Quantity= ($0.7-$0.8)*45000 = $4500
  • $0.80 :- Realized saving/loss on future delivery on this day = (Spot - Future)* Quantity= ($0.8-$0.8)*45000 = $0
  • $0.95 :- Realized saving/loss on future delivery on this day = (Spot - Future)* Quantity= ($0.95-$0.8)*45000 = ($6750)    Hence, Beazley would have incurred loss of $6750 if spot price would be $0.95 and they would be without lock in whereas there would have been a gain of $4500 if spot price would be $0.

b) The variability of Beazley's total outlay under the future contract will be $0.80*45000 = $36000

c) No we shouldn't have foregone entering into this contract because we can't predict the future price of cocoa and while its $0.70 per pound right now it's only with the hindsight we have this information. while if we get into the contract we lock in the price of one of our crucial ingredient which would bring some consistency in our profit.


Related Solutions

Suppose you are the Chief Financial Officer of a tech company and that you want to...
Suppose you are the Chief Financial Officer of a tech company and that you want to obtain a good estimate for the cost of capital of a new investment project. Your project is an investment in a new production line for semi-conductors and has an expected lifetime of 20 years. That is, you expect to receive cash flows from the project for 20 years. Explain how you would obtain a good cost of capital estimate for your project using two...
As the chief financial officer for ABC Company, you have to deal with unpredictable and large...
As the chief financial officer for ABC Company, you have to deal with unpredictable and large receipts and disbursements. Your company has adopted the use of the Miller-Orr model for management of checking balances. The variance of daily net cash flows is $14,392,000. The cost of making a purchase or sale of marketable securities is $170, and the rate you earn on marketable securities is 8%. Your company wishes to maintain a minimum balance in the checking account of $11,000....
As the Chief Financial Officer of a large multinational corporation, you are seriously concerned about the...
As the Chief Financial Officer of a large multinational corporation, you are seriously concerned about the volatility in foreign exchange rates and their impact on your company’s profits. Explain the three types of foreign exchange exposure that your multinational company may be exposed to, and how each of these exposures might affect the company’s strategy and performance. Discuss the various hedging strategies that the multinational company can pursue to overcome the adverse impact of foreign exchange rate changes, while doing...
You are an analyst at a large firm. The Chief Financial Officer presents the following free...
You are an analyst at a large firm. The Chief Financial Officer presents the following free cash flow data for ABC Corp (in millions of $). Year Cash Flow 2010 1600 2011 2600 2012 3200 2013 3400 2014 2300 She asks you to please calculate the: - Geometric Total Return - The Annualized Rate of Change Then, the director asks you to make a 10 year cash flow forecast based upon the annualized rate of growth in cash flow. Next,...
1. As a chief financial officer (CFO) of a large industrial firm, you need to raise...
1. As a chief financial officer (CFO) of a large industrial firm, you need to raise cash within a few months to pay for a project to expand existing and acquire new manufacturing facilities. What are the primary options available to you? 2. You work for an investment bank and you are to do a presentation to private wealth clients of your firm on the most fundamental facts concerning the role of interest rates in the economy. What main points...
You are the Chief Financial Officer of Hilton Ltd, a large manufacturing company operating within the...
You are the Chief Financial Officer of Hilton Ltd, a large manufacturing company operating within the Asian-pacific region. The CEO, Mr Ray Ellis, has just returned from a shareholders engagement event to promote the company’s upcoming right issue of shares. He was confronted with some questions relating to issue of shares and whether there were any pros and cons to issuing shares via rights, bonus or by private placement. Issues related to the company’s earnings per share (EPS) also came...
Suppose you are the chief financial officer for a pencim making firm that needs a new...
Suppose you are the chief financial officer for a pencim making firm that needs a new machine. Discuss the basic steps that you must go through to make this happen and the decisions that must be made for each one.
You have recently been hired as the chief financial officer (CFO) of a large hospital. Your...
You have recently been hired as the chief financial officer (CFO) of a large hospital. Your hospital has experienced major groeth and is proposing a new department of quality improvement. The new department has to be approved by the board of directors. The chief executive officer (CEO) has asked you to prepare a presentation for the board of directors to stress the importance of quality from a financial standpoint. Prepare a 15-18 slide powerpoint presentation describing the importance of delivering...
You have been hired as the new Chief Financial Officer for a large integrated health delivery...
You have been hired as the new Chief Financial Officer for a large integrated health delivery organization and your first goal is to improve the management information reporting of key company performance indicators.   You have decided this information would best be monitored and communicated using a dashboard which contains the following financial and operational metrics. Key Metric Titles: Total Margin Current Ratio Profit Per Discharge Occupancy Rate Average Length of Stay Return of Assets Select company data: 2017 Net Income...
Suppose you work for Shah Corporation as a Chief Financial Officer (CFO). The firm has no...
Suppose you work for Shah Corporation as a Chief Financial Officer (CFO). The firm has no debt outstanding. Total market value of the firm is $5,977,000. Earnings before interest and taxes, EBIT, are projected to be $393,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, then EBIT will be 30% lower. Shah Corporation is considering a $1,175,000 debt issue with a 6% interest rate....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT