Question

Orange Inc. has the next generation of MePhones lined up for production starting in November 2018. By then the company will need to order a new set of 3D printers for the new phone model. The project manager who’s in charge of this purchase only has a budget of $30,000, and he’s worried about prices of 3D printers rising above his budget between now and November 2018.

a. How can the project manager of Orange Inc. hedge the risk using the futures market? Explain it step by step in detail. Your answer must include what positions the project manager can take now and in November 2018.

b. Suppose the market price of 3D printers rises to $35,000 in November 2018. What would be the gains and/or losses of the project manager if he uses the futures market to hedge the risk? And what would happen if he uses the options market if the option premium is $4,500 for each contract?

c. Suppose the market price of 3D printers decreases to $25,000 in November 2018. What would be the gains and/or losses of the project manager if he uses the futures market to hedge the risk? And what would happen if he uses the options market if the option premium is $4,500 for each contract?

Answer 1