Question # 1

It is January 15 and a silver fabricator knows that it will require 100,000 ounces of silver on May 15 to meet a certain contract. The spot price of the silver is $26.24 per ounce and the May futures price on silver is $26.50 per.

1. What is the asset to be hedged?

2. What is hedging asset?

3. Will he purchase in both contracts?

4. How can the silver fabricator hedge the price rise risk and Locks-In the prices?

5. Suppose that price of the silver is $26.80 per ounce on May15, what is the total amount realized by the producer using hedging strategy?

6. Suppose that price of the silver is $26.20 per ounce on May15, what is the total amount realized by the producer using hedging strategy?