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# Hedging using futures contract

Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter's production of catalytic converters. It buys three-month futures contracts for 10,000 ounces at a price of \$550 per ounce.
a. Suppose the spot price of platinum falls to \$525 in three months' time. Does Phoenix have a profit or loss on the futures contract? Has it locked in the cost of purchasing the platinum it needs?
b. How do your answers change if the spot price of platinum increases to \$625 after three months?

#### Solution Preview

Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter's production of catalytic converters. It buys three-month futures contracts for 10,000 ounces at a price of \$550 per ounce.

a. Suppose the spot price of platinum falls to \$525 in three months' time. Does Phoenix have a profit or loss on the futures contract? Has it locked in the cost of purchasing the platinum it needs?

Contract size= 10,000 ounces
Futures price= \$550 per ...

#### Solution Summary

The solution demonstrates the use of futures contract to hedge risk

\$2.19