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3) You manufacture gold jewellery for sale to local retail outlets. This upcoming spring you will require 500 troy ounces of gold and you would like to hedge your risk of price fluctuations through NYMEX. Today's (June) price of gold is US $393 per ounce. The settle price on a futures contract to buy gold in April is US $403 per ounce. Assume you enter into a futures contract for 500 troy ounce of gold.
a) Assume the price of gold in the cash market, in your region of the country, in April is US $450 an ounce. Without taking delivery of your gold through the New York Exchange, close out the futures contract and calculate your gains, losses and net receipts on the 500 ounces of gold.
b) Assume the price of gold in the cash market, in your region of the country, in April is US $350 an ounce. Without taking delivery of your gold through the New York Exchange, close out the futures contract and calculate your gains, losses and net receipts on the 500 ounces of gold.
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The solution calculates gain and loss based on spot price and future price based on different scenarios.
A - When the spot price is $450 and June price is $ 393 , jeweller can buy spot gold at $393 in June as settlement price and sport price are almost equivalent and would have a gain of $ 57 in the future market, that a gain of $28,500, thereby decrease his effective cost of ...
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