Reference no: EM132515727

A dental firm has estimated its demand for silver to be 12,000 troy ounces around the late November. The firm is concerned that prices will rise in the interim and would like to lock in today's price of $6.25 without purchasing the silver today (June 15th). On June 15th, the CBOT's December futures contract trades at $6.65. Each futures contract controls 1000 troy ounces. The future price of silver is unpredictable, but the manager knows that the futures contract will be priced 35 cents higher than the spot price in late November. What would be the best hedging strategy for the firm to hedge against the commodity price risk of silver among the following choices, and what would be the total anticipated net cost of purchasing silver (in total $ terms) for the firm in this strategy?

A. In at T=0 (i.e., in June), the firm buy 12 futures at $6.65; and at T=t (i.e., in November), the firm offsets the futures contract and sell the silver in the spot market. The total anticipated net costs of purchasing silver would be $74,800.

B. In at T=0 (i.e., in June), the firm buy 12 futures at $6.65; and at T=t (i.e., in November), the firm offsets the futures contract and sell the silver in the spot market. The total anticipated net costs of purchasing silver would be $79,800.

C. In at T=0 (i.e., in June), the firm buy 12 futures at $6.65; and at T=t (i.e., in November), the firm offsets the futures contract and buy the silver in the spot market. The total anticipated net costs of purchasing silver would be $74,800.

D. In at T=0 (i.e., in June), the firm buy 12 futures at $6.65; and at T=t (i.e., in November), the firm offsets the futures contract and buy the silver in the spot market. The total anticipated net costs of purchasing silver would be $79,800.

E. None of the above