Question
A silver producer plans to sell 50,000 ounces of silver in October 2021 (i.e., 3 months from now). To hedge this transaction, it decided to
A silver producer plans to sell 50,000 ounces of silver in October 2021 (i.e., 3 months from now). To hedge this transaction, it decided to enter into ten silver futures contracts today. The details of the contracts are as follows:
Maturity of the contracts: November 2021 (i.e., 4 months from now) Contract size: 5,000 ounces Initial margin: $2,000/contract Maintenance margin: $1,800/contract Today's silver futures price: $17.40/ounce Today's silver spot price: $17.25/ounce Standard deviation of changes in futures prices: 0.35 Standard deviation of changes in spot prices: 0.31 Correlation coefficient between changes in futures prices and changes in spot prices: 0.90
Please comment on the appropriateness of the hedge ratio that the company used.
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