1. What are similarities and differences between futures contracts and forward contracts?
2. When the use of options can be detrimental to the profitability of the company?
3. Harry a rice producer is concerned about short term volatility in its revenues. Rice currently sells for $ 2000 per ton. Since market is volatile so he foresee that selling price could fall as low as $ 1800 per ton or as high as $ 2200 per ton in near future. Harry is planning to supply 5000 tons to market in next month.
(A) What is the consequence if Harry does not hedge against price risk?
(B) What is the cost/benefit to Harry if he enters into a future contract to deliver 5000 tons of rice at an agreed price of $ 2100 per ton next month?