Suppose that you are a silver fabricator. You will acquire 2,000,000 troy ounces of silver at the prevailing market price on March 2020, 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 closing price of March 2020 future the date when you enter into the future contracts.

1. Which type of hedge, between short and long, has to be used?

2. What is the contract size of the silver futures per one contract? How many contracts do you have to trade?

3. State the December futures price (last closing price) that you determined. Attach the snapshot of the price listing. See an example.

4. Assume that both the spot and future prices on the March 2020 maturity date, 2017 are $11 per ounce. Find out profits of the unhedged spot position, future position and hedged position (hedged position = unhedged spot position + future position)

5. Assume that both the spot and future prices on March 2020 maturity date are $26 per ounce. Find out profits of the unhedged spot position, future position and hedged position.

6. Discuss the effectiveness of your hedged.

7. Now, suppose that you don't 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 future market to acquire silver and to hedge 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 hedged in (1) ~ (5).