Author Question: To hedge the price risk associated with one of its major inputs, Binford Homes uses lumber futures ... (Read 115 times)

tfester · **on:** Apr 25, 2021

To hedge the price risk associated with one of its major inputs, Binford Homes uses lumber futures contracts which trade on the Chicago Mercantile Exchange (CME). The CME Random Length Lumber futures contract calls for delivery of 110,000 board feet (110 MBF, 1 MBF is 1,000 board feet of lumber) of random length 8-foot to 20-foot pieces. Primarily, the deliverable species is Western Spruce-Pine-Fir.

In October of last year, Binford Homes bought 100 CME lumber contracts for March delivery at a price of $300 per MBF. It is now March 16th and Binford buys lumber in the spot market, where it trades for $263 per MBF, and executes an offset trade in the futures market. Today's futures prices are quoted in the table below.

Expiry Month	Settlement Price	VOL	Open Interest
March	262.50	900	4000
May	278.70	146	416
July	283.00	2	26

What is your total purchase cost for the 110 MBF of lumber? The total purchase cost includes profits from the futures transactions.
◦ $300.50 per MBF
◦ $300.00 per MBF
◦ $262.50 per MBF
◦ $263.00 per MBF

Shshxj · **Reply #1 on:** Apr 25, 2021

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