You own a cyber security firm and only take payment in bitcoin. Whenever you receive a payment you convert 40% into AUD for your everyday spending and keep the remaining in the digital currency. You are currently working on a project that will pay you 100 bitcoins at the end of the year. The current spot rate is $19000/Bitcoin. The current futures rate for one year into the future on the ASX is $21000/Bitcoin.

1. You are concerned that the value of bitcoin will drop over the next year which will decrease the amount you are able to spend. How would you hedge your risk using the above information? Demonstrate that the hedge is successful by considering cases where the spot rate after one year is $23000/Bitcoin and $10000/Bitcoin.

2. Bitcoin is a relatively new financial asset and as such on many exchanges there are no traded bitcoin futures. If no future existed and you had to find another party to take the other side of your hedge, what name would we give to such a financial contract? What are the disadvantages of such a product relative to a futures contract?