Alternative ecocnomic futures Essay Example | Topics and Well Written Essays - 500 words

Alternative ecocnomic futures - Essay Example 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.