Hedging Strategy and Risk Management for Alpaca Corp.

At the beginning of the fiscal year, Alpaca Corp., a U.S.-based firm, anticipates that its costs will increase due to fluctuating prices of raw materials. To stabilize budget forecasts, the company decides to implement a hedging strategy using commodities futures contracts. The current market price of raw materials is $50 per unit, and Alpaca Corp. enters into a futures contract to buy 1,000 units at a price of $52, to hedge against rising costs.

Midway through the fiscal year, due to unexpected supply chain disruptions, the spot price of the raw materials rises to $60. Discuss the following:

• Explain the mechanics of how Alpaca Corp.’s hedging strategy works in this scenario, highlighting the importance of futures contracts in managing risk.
• Analyze the implications of the price change on Alpaca Corp.'s financials and its overall risk exposure.
• Evaluate potential alternative risk management strategies that Alpaca Corp. could employ to address the increased costs, considering both derivatives and traditional methods.