How to Mitigate the Risk of Price Increase in Lumber Market

What can you do to mitigate the risk of an increase in the price of lumber in the next 6 months?

A. Sell a futures contract on lumber

B. Buy a futures contract on lumber

C. Buy a customized futures contract for the amount of lumber needed for your company

D. Short a futures contract for lumber

Answer:

To mitigate the risk of an increase in lumber prices, the company should consider buying a futures contract on lumber.

Buying a futures contract on lumber allows the company to secure a fixed price for the lumber they will need in the future. By entering into a futures contract, the company is essentially agreeing to buy a certain amount of lumber at a predetermined price on a specified date. This provides protection against potential price hikes in the lumber market.

By buying a futures contract, the company can lock in the current market price, even if lumber prices increase in the next 6 months. This strategy helps the company hedge against the risk of rising lumber prices, ensuring a predictable cost for their lumber procurement needs. If the price of lumber does indeed increase, the company can still purchase lumber at the lower contracted price, thereby saving money.

Furthermore, buying a standardized futures contract offers liquidity and flexibility. The company can easily exit the contract by selling it if they no longer require the lumber, or they can roll it over to a future date if their needs change.