Apex Industries Futures Hedge Analysis

Very Hard Derivative Strategies Futures And Forwards

Apex Industries, a global manufacturing firm, is concerned about fluctuations in the price of aluminum, which it requires in large quantities for its production processes. The firm anticipates a significant increase in production next quarter and expects that rising aluminum prices will adversely impact its profit margins. To hedge against this risk, Apex’s treasury department is considering using a futures contract on aluminum.

They have the following information: a nearby futures contract on aluminum is currently priced at $2,500 per ton, the correlation between aluminum prices and the company's profit margin is assessed to be high (0.85), and the company’s exposure is estimated at 100 tons of aluminum. The treasurer is evaluating the impact of a futures strategy on the overall cost of aluminum for the company.

If the prices of aluminum in the spot market increase to $2,800 per ton by the contract expiration, which of the following statements regarding Apex Industries’ financial position is true?

Apex Industries will incur a net loss on the hedged position due to the futures contract being objectively less valuable than the notionally applied spot price.

The gain on the futures contract will offset the price increase in the spot market, which would position the company to maintain a stable cost of aluminum.

The hedge will result in an overall loss for Apex Industries because futures contracts do not result in cash flows until maturity.

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