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Which month maturity do you have to use

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Suppose that you are silver . You will acquire 2,000,000 troy ounces of silver at the prevailing market price on June 2, 2016, from your long-time business partner. But you worry about the uncertainty in the market price of silver in the future. Hence, you decide to use Globex ("online") silver contracts to hedge risk. You will place an order of silver contracts at the last day closing price of the date when you enter into the future contracts.

1. Which month maturity do you have to use?

2. State the date you enter into the silver future contract and future price last closing price) that you determined. * Use the same date and closing price that you use for the group mini case of "perfect" long hedge.

3. Assume that the spot and futures price on June 2 are $11 and $10.5 per ounce, respectively.

3a. Find out the effective buy price and compare with the locked-in future price. Are they the same? Find out the value of basic.

3b. Find out profits of unhedged spot position, future position and hedged position. (Hedged position= unhedged spot position + future position)

4. Assume that the spot and futures price on June 2 are $16 and $15.7 per ounce, respectively.

4a. Find out the effective buy price and compare with the locked-in future price. Are they the same? Find out the value of basic.

4b. Find out profits of unhedged spot position, future position and hedged position. (Hedged position= unhedged spot position + future position)

5. Discuss the effectiveness of your hedge. Is the hedge perfect or imperfect? Does the purchase cost of silver depend on the uncertainty in the market price?

Reference no: EM132481639

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