Suppose that you are a silver fabricator. you will acquire 2,000,000 troy ounces of silver at the prevailing market price on the maturity date December 2017 form 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 silver futures contracts to hedge risk. You will place an order of silver futures contract at the last closing price of July futures the date when you enter into the futures contracts.

5. Assume the both the spot and futures prices on the December maturity date are $26 per ounce. Find out profits of the unhedged spot position. futures position and hedged position.

6. Discuss the effectiveness of your hedge.

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