3. It is now Jan 1st, 2018. As the proud owner of a chain of jewelry stores, you are concerned about an increase in the price of silver and would like to hedge this risk using futures contracts. Specifically, you would like to hedge against any changes in the price of silver between now and Valentines Day (Feb 14th), when you will purchase 10,000 troy ounces of silver to replenish inventories. Listed contracts on silver include delivery months of January, March, May, July, September and December only. Each contract calls for the delivery of 5,000 troy ounces.

   1. Which contract will you most likely choose for hedging? Explain.

   2. Will you achieve a perfect hedge? Explain.

   3. The table below displays spot and futures prices per troy ounce of silver. Based on the listed

      prices, what is the spot price of a troy ounce of silver on the March delivery date?

   4. Illustrate your answer in part (b) using the prices in the table below. What is the cost of 10,000

      troy ounces of silver on February 14th? How much of that cost is offset by the hedge?

Delivery Month Spot January March Price on Feb 14th $14.18 Price at March Delivery ? Price on Jan 1st $14.00 $14.15 $14.24 $14.36 $14.44 $14.52 $14.65 May July September December $14.30 $14.32 $14.34 $14.46 $14.63 $14.32 $14.36 $14.44 $14.51 $14.63 Delivery Month Spot January March Price on Feb 14th $14.18 Price at March Delivery ? Price on Jan 1st $14.00 $14.15 $14.24 $14.36 $14.44 $14.52 $14.65 May July September December $14.30 $14.32 $14.34 $14.46 $14.63 $14.32 $14.36 $14.44 $14.51 $14.63