You will acquire 2,000,000 troy ounces of at the prevailing market price on July

Question

You will acquire 2,000,000 troy ounces of at the prevailing market price on July 15,2016 for your long term business partner. But you are worried about the uncertainty of the market price in the future. Hence you decide to use Globlex silver feature contract to hedge your risk. You will place an order of silver contracts on the last day of closing price of the date you enter into the future contract. What type of hedge(short or long has to be used) as well as your contact size of the silver feature of one contract(How many contacts do you have to trade)?

Explanation / Answer

Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between two parties to buy or sell an asset at a particular time in the future for a particular price. If a company knows that it will be selling a certain item, it should take a short position in a futures contract to hedge its position.

                   So,we entered into short hedge strategy as we buy 2,000,000 troy ounces of at the prevailing market price on July 15,2016               

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