pter 21: Problem 2 In February, Tech Components, Inc. (TCI), a manufacturer of s

pter 21: Problem 2
In February, Tech Components, Inc. (TCI), a manufacturer of specialized electronic components, was negotiating a supply agreement with a major auto manufacturer to supply specialized electronic components for delivery in 6 months. One of the key inputs in making these specialized components is silver. The current spot price of silver is $25.15 per troy ounce. The 6-month futures price for silver is $26.90.
a. What silver price should TCI use as it establishes a price to quote to the auto manufacturer—the current price or the 6-month futures price?
b. Set up a hedge using the futures market for silver that will protect TCI against increases in the price of silver over the coming 6 months.
c. How could TCI use options to hedge this risk? Which type of options should be used—puts or calls?
Chapter 22: Problem 7
The Jennette Corporation, a firm based in Mt. Pleasant, South Carolina, has an account payable with a British firm coming due in 180 days. The payable requires Jennette to pay 200,000 pounds. Winthrop Jennette, the firm’s founder and CEO, is an astute manager. He has asked his CFO, Artis Montgomery, to advise him on the various options for dealing with the exchange risk inherent in this payable. He wishes to know the expected dollar cost of (1) a forward hedge, (2) a money market hedge, and (3) remaining unhedged.
The following information is available to Artis. The spot rate of the pound today is $1.50. The current 180-day forward rate of the pound is $1.47. Interest rates are as follows:
United Kingdom
United States
180-day deposit rate
4.5%
4.5%
180-day borrowing rate
5.0%
5.0%
a. What is the expected dollar cost of the forward hedge?
b. What is the expected dollar cost of the money market hedge?
c. What is the expected dollar cost of the remaining unhedged?
d. Which alternative do you recommend? What are the risks associated with this recommendation?