Commodity Price Risk

Assume it is late December and you are the risk manager for the Comfy Cabin business at Place of Ponds, Inc. Your job is to not only identify and mitigate risks to the business, but also communicate those risks to management, who may or may not have a grasp of commodity price risk or “fancy” hedging tools like futures.

Part I

1.  Describe as simply as possible, the kind of risk facing Comfy Cabin in 2017. Everything you need to know has already been described.
2.  Hypothetically, how could Comfy Cabin change its pricing strategy (i.e. do something other than a fixed price on final goods sold to retailers) to mitigate risks to its bottom line without using futures?
3.  Calculate Comfy Cabin’s total annual component pounds used to make pudding.
   1. Milkfat pounds
      1. Convert milkfat pounds to butter pounds
   2. Nonfat dry milk pounds (NFDM
4. Suppose you choose to use butter and nonfat futures to manage risk. Calculate the total number of futures contracts needed to cover all milk components used in making pudding.
5. Butter contracts per month
6. NFDM contracts per month
7. Can you perfectly hedge exposure? Why or why not?

1. • 1. 4. Suppose you choose to make use of Class IV futures to manage risk, in addition to butter and NFDM futures. Calculate the number of Class IV contracts you would need to cover:
           1. Butter exposure