The following report is a modification of the exercise in price forecasting. You have been asked to forecast the price of a commodity on November 2, 2016. So that your organization may take the most advantageous procurement action possible, your organization needs $5 million worth of this commodity for delivery any time during the month of November. The amount, $5 million worth, is based on the spot price of this commodity on September 21, 2016.
What is the current (September 21, 2016_) spot price of this commodity, based on what quotation? What is the specification of the commodity and what is the minimum amount of purchase required for the quoted price to hold? How much in weight or volume does $5 million represent?
What spot price do you forecast for this commodity on November 2, 2016. Why?
In view of your forecast what recommendation would you make to the executive committee of your organization regarding the purchase of this commodity? Would you advise buying now and taking delivery now or later? Would you hedge? Would you delay purchase? Anything else? What savings do you forecast from your recommendation?
- The commodity selected may not be a pegged price in the market at which you are purchasing. It must be a freely fluctuating price and it must be traded on a recognized commodity exchange with published prices for both spot and futures. 2.It is not necessary to stay with the commodities listed in the text. 3. Foreign exchange rates may be an important consideration in your decisions. 4. This report has two parts. a). A written report to be submitted in on September 26 before 10 a.m. b) A written evaluation report to be handed in before 10 a.m. November 4, 2016, including the November 2 actual price. The evaluation should compare the actual price with forecast. It should also include a savings (loss) estimate in view of the recommended action in the September report. .
1) The amount of $5 million is in U.S. dollars. Exchange rates with foreign currencies have to be considered as part of this problem. 2) There is a commission for every commodity. 3) In the case of purchase and storage ahead of November 1, the carrying cost is 1 1/2 percent per month. There are no savings by waiting to spend until December 1. 4) If the market has a daily variation and quotes high and low and closing for the day, please be consistent and use the same type of quotation throughout. For example, it is not right to use the low quotation on September 21 and compare it to the high on November 2.
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