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 or 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 the spot price for lumber is $263 per MBF. How can Binford complete its futures trade?
I. Sell the 100 CME contracts that they purchased.
II. At maturity take delivery of the lumber and pay the associated transportation costs.
III. Take a new short position in 100 CME March lumber contracts.
IV. Buy 100 CME May lumber contracts.
◦ I only
◦ I or II
◦ II or III
◦ II only
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