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Describe disadvantages of using futures contracts

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Question: The Carrington mine in north-west Queensland, Australia, is the tenth biggest silver mine in the world and is owned by an Australian company BHP.

BHP therefore sells large quantities of silver, which exposes the company to significant risk of silver prices moving unfavourably.

BHP could hedge this exposure by using futures contracts, forward contracts or option contracts, where the contracts are written on silver.

Required: Discuss the advantages and disadvantages of using futures contracts, forward contracts and option contracts for the purpose of hedging exposure to movements in the price of silver.

You must make at least six valid points to get full marks for this question.

Reference no: EM132760330

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