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Discuss the disadvantages of using futures contracts

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Reference no: EM132758593

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:

Problem 1: 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: EM132758593

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