A manufacturer needs to buy 20,000 ounces of silver in three months time. The current spot price is S=23.50/oz. The futures price with a settlement date in three months is F=23.75/oz. In three months time the following occurs - F=24.00/oz and the spot price is $24.00/oz.

14. How many contracts does the manufacturer need?

a. 1

b. 2

c. 3

d. 4 Answer

e. 5

15. If the manufacturer needs to buy silver, what position should it take in the futures market to hedge?

a. Long position Answer

b. Short position

c. None because the price of silver is expected to increase only a small amount

d. None because futures prices and spot prices converge at settlement

e. Both long and short

16. The manufacturer has (need answering)

I. A gain in the futures market of $5,000

II. A loss in the spot market of $10,000

III. A net gain of $5,000

a. I only

b. I and II

c. I, II, and III

d. II and III

e. III only