Alternative ecocnomic futures - Essay Example

Alternative Economic Futures and Section # of Alternative Economic Futures The futures contracts on commodities have proved to be successful, with futures trading getting robust at organized exchanges, such as Chicago Board of Trade. The commodities such as corn, oats and wheat etc. are the major commodities that have become a part of the trade. For a company like Larson Inc., which operates in both America and Germany, the economies that are undergoing the aftermath of global meltdown, it needs to have a strategy that improves the survival and ultimately result in improvement of the bottom line for the industry.

Larson Inc. should hedge itself against any adverse price movements and fluctuations. What Larson Inc. could have done is to buy its inputs in one country and at the same time sells a futures contract for the same amount of input. When the inventory is utilized, the company can buy back the futures contract. The price change occurring during the two transactions will effectively be cancelled by the mutually compensatory movements in the cash and the futures holdings. In this scenario, futures will provide insurance.

Larsons Inc. is betting on the correlation between the spot and the futures prices to move together. Another use of alternative economic futures by Larson Inc. can be that of interest rate futures, which will help it to lock the future investment rate. The use of debt to finance its expansion needs and working capital expenses can protect it from any changes in the interest rates. For any anticipated upwards movement in the interest rates, Larson Inc. can buy the futures contract and pay the seller an amount that will be equal to the difference that it benefits from any rate that has been mentioned or committed in the futures contract.

Similarly, if the interest rates fall the seller will compensate Larson Inc. at the expiration of the futures contract between the two parties. The foremost advantage is that for an American operation trading of futures in the Chicago Mercantile Exchange is easy. Since Larson Inc. can also require hedging the foreign interest rates in US for any borrowings made in Germany, some of the options in the short term that it has available include 3 month Eurodollars, 1 month LIBOR, Euro yen, 13 week treasury bills (t-bills), 1 month Fed funds rate, 91 day Cetes, 28 day TIE etc.

So far we have discussed a commodity futures and a financial futures option. The commodity futures type of hedge can be used in hedging the inputs for Larson Inc.; whereas, the financial futures like hedging from any interest rate movement from occurring in either of the direction will help shape its investment plans and needs. Another important area that needs to be looked into is protecting against any adverse movements in the output prices because of deflationary economy, or on the other extreme any upwards movement because of input cost increases.

In Asian and African economies, that themselves are quite risk averse, futures contract may help in committing the price specified for Larson Inc.'s output. ReferencesGarbade, K.D. (1981) Futures Contract on Commodities with multiple variteties. NewYork: Solomon Brothers Centre for the Financial Institutions.