Commodity Price Forecasting

Your group will forecast the price of a commodity on May 1, 2020. So that your organization may

take the most advantageous procurement action possible, your organization needs $5 million worth

of this commodity for delivery within a few days of May 1. The amount, $5 million worth, is based

on the spot price of this commodity on February 1, 2020.

Part 1

Conduct a commodity analysis and include the following points in your report write-up. Go in depth

enough to gain some understanding about your commodity, what its major uses are, industries it

supports or is connected to, etc.

Question 1

What is the current (Feb 1) 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?

Question 2

What are the current futures for your commodity on May 1, 2020?

Question 3

What spot price do you forecast for this commodity on May 1, 2020? Rationale? (Hint: show your

calculation and also explain what’s going on economically, politically, with industries that are heavy

users of the commodity, etc. that may qualitatively increase or decrease your forecast calculation—

explain effective qualitative adjustments to your calculated forecast).

Question 4

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 or later and

taking delivery now or later? (Hint: your options are to buy at the spot rate now and store, buy a

futures contract and take delivery later, or buy spot on May 1 and take delivery then). Would you

hedge? Would you delay purchase? Anything else? What savings do you forecast from your

recommendation?

Part 2

Question 1

What is the current (May 1, 2020) spot price?

Question 2

How close did your group’s forecast get to actual value

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