Georgjensen is a large jewellery manufacturer. One of the popular ranges is platinum jewellery.

Georgjensen therefore needs to buy quantities of platinum to use in the manufacture of its jewellery, which exposes the company to significant risk of platinum prices moving unfavourably.

Georgjensen could hedge this exposure by using futures contracts, forward contracts or option contracts. However, the derivatives market for platinum is not very liquid. The treasurer for Georgjensen has done some research and found out that changes in platinum prices are correlated with changes in gold prices. The correlation over 1986 to 2019 is found to be+0.83.

Required:

Discuss the advantages and disadvantages of using futures contracts, forward contracts and option contracts on gold for the purpose of hedging exposure to movements in the price of platinum.

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