ABC Diamond wants to lock in the cost 1,000 carats of diamonds to be used in its next quarter's production of newly designed wedding rings. It buys three-month futures contracts for the price of £1,000 per carat.

a)  Suppose the spot price of diamonds falls to £800 in three months' time. Does ABC Diamond have a profit or loss on the futures contracts? Has it locked in the cost of purchasing the diamonds it needs?

b)  What if the spot price of diamonds increases to £1,200 after three months instead?

Answer rating: 100% (QA)

a If the spot price of diamonds falls to 800 in three months time ABC Diamond would have a loss ... View the full answer