Problem:
Required:
1. One strategy used by Kraken Group is to buy pulp-paper futures on commodities exchanges. Paper prices can go up and down by more than 10% in a short period. When paper prices increase, Kraken’s operating profits fall. Explain how pulp-paper futures can be used to protect Kraken’s profits from harmful paper price increases.
2. How will the pulp-paper futures affect profits if paper prices instead decline?
3. Ink prices tend to be even more volatile than paper prices but cannot be hedged by exchange-traded futures. So, Mr. Fowler asked an ink supplier to set up a forward contract for about half of the amount purchased each year. Explain how a forward contract can be used to protect Kraken’s profits from harmful ink price increases.
4. How will the forward contract affect profits if ink prices instead decline?
The information is enclosed below. Please find attachment.
Attachment:- Kraken Group.rar