12/11/21, 11:23 AM Zeta, An Automotive Battery Manufacturer, Uses Zin... | Chegg.

com

  Home Study tools

 My courses
 My books My folder Career Life Study Pack 

Find solutions for your homework Search

home / study / business / finance / finance questions and answers / zeta, an automotive battery manufacturer, uses zinc as a manufacturing input.…

Question: Zeta, an automotive battery manufacturer, uses Zinc as a

man… Post a question
Answers from our experts for your tough
homework questions

Zeta, an automotive battery manufacturer, uses Zinc as a

manufacturing input. Zinc costs presently Rs 275 Enter question
per kg and Zeta
uses around 20 metric tonnes of zinc per month. Concerned about the
volatility in zinc
prices, the manufacturer is considering the
following alternatives:

 Not hedging the zinc price risk

 Buying and keeping inventory of zinc

 Using derivative contracts (forwards, futures, and options) Continue to post

a. What positions Zeta should take in each derivative contract
(forwards, futures, and options)?
20 questions remaining
b. What are the comparative advantages and disadvantages of using
each of the derivative contracts
considering the alternatives?

My Textbook Solutions
Expert Answer

Anonymous answered this

Was this answer helpful? 0 0
782 answers

a)
Operations... ePack:... Econom
forward contract = zeta should buy forrward comtract and settle
the contract on the specified date and 18th Edit
take delivery of the zinc on
the specified date 12th Edition 5th Edition

View all solutions

future contract = zeta sell the future contract and buying in
the physical as his the price collapse then the
compensate by
physical holding and if the price gone then it should be conpensate
by future

option contract = zeta continonue by in the physical and buy put

option of zinc by paying dividend

b)

forward contract

Advantages

• The use of forwards provides price protection as it fixes price

for the future date.

• Forwards are over-the-counter products.

• Margins are not paid and there is also no upfront premium. So, it
does not involve initial cost.

The disadvantages of forward contracts are:

• It requires tying up capital. There are no intermediate cash

flows before settlement.

• It is subject to default risk. The risk of dishonouring the

contract from either of the party is very high,
because no third
party is guarantying the contract.

future contract

The most common advantages include easy pricing, high

liquidity, and risk hedging.

The major disadvantages include no control over future events,

price fluctuations, and the potential
reduction in asset prices as
the expiration date approaches.

option contract

Advantgage

No so much investment require to but the Put option

disadvantage

if price not move then the premium will be erode

Comment


https://www.chegg.com/homework-help/questions-and-answers/zeta-automotive-battery-manufacturer-uses-zinc-manufacturing-input-zinc-costs-p… 1/2
12/11/21, 11:23 AM Zeta, An Automotive Battery Manufacturer, Uses Zin... | Chegg.com

  Home Study tools

 My courses
 My books My folder Career Life Study Pack 

COMPANY

LEGAL & POLICIES

CHEGG PRODUCTS AND SERVICES

CHEGG NETWORK

CUSTOMER SERVICE

© 2003-2021 Chegg Inc. All rights reserved.

https://www.chegg.com/homework-help/questions-and-answers/zeta-automotive-battery-manufacturer-uses-zinc-manufacturing-input-zinc-costs-p… 2/2