Question
You own an asset for which there are always actively traded Futures contracts every 3 months up to one year out. We are exactly 3
You own an asset for which there are always actively traded Futures contracts every 3 months up to one year out. We are exactly 3 months away from the delivery of the next contract. You are planning on selling your asset in 6 months and started considering using the Futures markets to attempt to lock-in a price.
(a) Explain what we mean by locking-in a price. How exactly is that achieved? Assume the Futures contract size is one unit of the asset you own. (b) Suppose that you realize that you can only sell the asset in 7 months. Are you able to approximately lock-in a price as in (a)? What would your hedging strategy be in this case? (c) Suppose that you have a similar asset that you plan to sell in 18 months. Youd like to use Futures contracts to limit the market exposure you have. What is your strategy, and what are the risks involved?
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