# Assignment: Silver long heedge using futures contracts Suppose that you are a silver fabricator.

Assignment: Silver long heedge using futures contracts

Suppose that you are a silver fabricator. you will acquire 2,000,000 troy ouncesof silver at the prvailing market price on July 15, 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 futures contracts to hedge risk. you will place an order of silver futures contracts at the last day closing price of the date when you enter into the futures contracts.

(1) which type of hedge, betweenshort and long, has to be used?

(2) What is the contract size of the silver futures per one contract? How many contracts do you have to trade?

(3) State the date you enter into the silver futures contract and futures price ( last closing time) that you determined. Attach the snapshot of the price listing.

(4) Asumme that both the spot and futures prices in July 15,2016 are \$11 per ounce.  Find out profits of the unhedge spot position, futures position and hedged position.

(5) Assume that both the spot and future prices in July 15 are \$16 per ounce. Find out profits of the unhedge spot position, futures position and hedged position.

(6) Discuss the effectiveness of your hedge?

(7) Now, suppose that you don’t have to acquire 2,000,000 ounces of silver from your business partner at the spot market in July. You will directly use the silver futures marker to acquired silver and to hedge price risk.  Determine the cost to acquire silver of 2000,000 ounce. Explain this hedge and compare with hedge in (1)-(5).

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