You will acquire 2,000,000 troy ounces of at the prevailing market price on July 15,2016 for your long-term business partner. But you are worried about the uncertainty of the market price in the future. Hence, you decide to use Globex silver feature contract to hedge your risk. You will place an order of silver feature contracts to hedge risk. You will place an order of silver features contacts at the last day closing price of the date when you enter into the feature contracts.

1. Which month maturity do you use?

2. State the date you enter into the silver futures contract and the futures price(last closing price) that you have determined ?

3. Assume the Spot and features price on June 2 and $11 and $10.5, respectively Do the same for June 2nd but the prices being $16 and $15.7 respectively

3a) Find out the effective buy price and compare with the locked in future price . Are they the same? Find out the value of the basis

3b) Find out the profits from the unhedged spot position, features position and hedged position Discuss the effectiveness of the hedge is it perfect or imperfect?

Does the purchase of the cost of silver depends on the uncertainty of the market

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