Management and Organizational Studies 4312A/B Chapter Notes - Chapter 3: Futures Contract, Spot Contract

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 4312A/B
• Professor: Shahbaz Sheikh

Document Summary

We assume the position of hedge and forget strategy. When hedger owns or expects to sell an asset. Company will end up with the future"s contract they started with. When a company knows it will have to purchase a certain asset in the future and wants to lock in the price now. Want the value of the asset to increase to make gain. If you buy it right now, additional interest and storage costs may surface. Hedgers with long positions usually avoid any responsibility of having to take delivery by closing out their positiongs before the delivery period. Allows companies to focus on their business and not fluctuating interest rates, exchange rates, and commodity prices. One argument against: shareholders can do the hedging themselves. But this assumes that the shareholders have as much information as management. Size of futures contract, commissions and transactions costs also makes hedging by an individual shareholder impossible in many situations.