UBC Undergraduate Research

The role of lumber futures markets for forest products firms : do forest products firms take positions in lumber futures market Wong, Jack

Abstract

The theory of the firm under price uncertainty and the role of futures market have been the subject of numerous studies. According to Feder, Just and Schmitz, firms are under price uncertainty and futures contracts are playing an increasingly important role in the commodity markets (Feder et al. 317). In 1969, large forest products firms began engaging in hedge practices in order to mitigate their exposures to change in supply and change in inventory price. Forest products firms acquire their input from forest operation and sell their output to lumber product manufacturers. The output prices vary depending mainly on the spot price of lumber in the commodity markets. Assuming that the forest products firms are risk-adverse, these firms will benefit from writing lumber futures contracts in order to reduce their exposures to output price fluctuations due to variation in market players’ objectives and expectations. This paper investigates how large forest products firms use the lumber futures market to achieve their business objectives. Comparison and analysis of academic research from economists and industry professionals have demonstrated that futures markets aim the forest products producers facilitate risk management, discover future prices, and make decisions under uncertainty. With these benefits, it is reasonable to assume that the use of lumber futures is a common practice in the forest product industries. To determine the extent of use of lumber futures contracts, I analyze the financial statements of five public North America forest product companies. My research has shown that only one out of the five forest product companies participate in the lumber futures market. Therefore, this paper also aims to examine the reasons for this lack of participation.

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Attribution-NonCommercial-NoDerivatives 4.0 International

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