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You have a commitment to supply 10,000 oz of gold to customer in three months' time at some specified price and are considering hedging the price risk that you face.

In each of the following scenarios describe the kind of order (market, limit, etc) that you would use and why you would use that.

a. You are certain you wish to hedge and want to take up a futures position regardless of the price.

b. Gold futures prices have been on an upward trend in recent days and you are not sure you want to enter the market right now. However, if the trend continues, you are afraid you will be locked into too high a price. Weighing the pros and cons, you decide you want to take a futures position if the price continues to trend up and crosses $370 per oz.

c. Consider the same scenario as in b, but now suppose also that you expect a news announcement that you think will drive gold prices sharply lower. If matters turn out as you anticipate, you want to enter into a futures position at a futures price of $350 oz or lower. However you recognize there is a probability the news announcement may be adverse and gold prices may continue to trend up. In this case you want to buy futures and exit if the prices touch $370 oz.

d. You want to institute a hedge only if you can obtain a gold futures price of $365 oz or less.

e. gold futures prices have been on a downward trend in the last few days. You are hoping this continues but dont anticipate prices will fall too much below $362/oz so you are willing to take the best price you can get once prices are at $364/oz.

 

Basic Finance, Finance

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