Suppose that you are a silver fabricator. You will acquire 2,000,000 troy ounces of silver at the prevailing market price on July 15, 2016, from your long-time business partner. But, you worry about the uncertainty in the market price of silver in the future. Hence, you decide to use Globex (online) silver future contracts to hedge risk. You will place an order of silver future contracts at the last day closing price of the date when you enter into the futures contracts at the last day closing price of the date when you enter into the future contracts.

1. Assume that both the spot and future prices in July 15 are $16 per ounce. Find out profits of the unhedged spot position, future position and hedged position.

2. Discuss the effectiveness of your hedged.

3. Now, suppose that you dont have to acquire 2,000,000 ounces of silver from your business partner at the spot market in September. You will directly use the silver future market to acquire silver and to hedge price risk. Determine the cost to acquire silver and to hedge price risk. Determine the cost to acquire silver of 2,000,000 ounces. Explain this hedge and compare with the hedged in (1) ~ (5).

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