Thomas Foods -- Hedging Strategies
If Thomas Foods expects to protect itself against suddenly rising prices that farmers charge for their produce -- due to crop failures, inclement weather, or other unexpected events -- then Thomas Foods needs to engage in some form of a hedging strategy. There are a number of ways to do this, and this paper will point to several strategies and models that might work for Thomas Foods. At a minimum, the comptroller at Thomas Foods should be knowledgeable about ways to protect his company from suddenly skyrocketing produce prices
What are "futures"? The available literature on ways to protect a company like Thomas Foods from suddenly being stuck with prices from farmers that are well above what was understood at the outset of the contract -- is to buy futures. A future is a financial deal signed as a contract that obligates the "…buyer to purchase an asset (or the seller to sell an asset)" such as produce from farmers at a "predetermined future date and price," according to investopedia.com. For example, say a farmer is producing corn; that farmer could use futures to "lock in a certain price" for his corn, and hence reduce the risk, or hedge the risk against falling...
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