Highland Park Wood Company (Abridged)
A major home builder wishes to purchase lumber (Southern pine). The builder wants delivery in six months but prefers to lock-in the price near current rates. The lumber wholesaler must decide on a pricing and sourcing strategy. Examples include: 1) buy & hold, 2) wait and see, and 3) hedge with futures. There is no futures market in Southern pine, but there is a market in Hem-Fir (a somewhat similar wood). Data on historical spot and futures prices is provided.