Question 2 : (5 marks) You are a jewelry maker. Every September you purchase 15,000 troy ounces of silver. Today, you hedged your position at what turned out to be the highest price for the day (the prices for July and September are shown in Fig. 1 below) .

Assume that the actual price per troy ounce of silver is 10.361 at the time you make the purchase in September.

Assume a Silver contract is of 5,000 troy oz.; price are in $ per troy oz.

a. How do you hedge this (state whether buy or sell and how many contracts)?

b. Calculate the notional value of the contract.

c. How much would you have saved not entering in the contract ?

Fig. 1 Futures Prices of Silver for July and September

Open High Low Settle Change Lifetime High Lifetime Low Open Interest

Jul 10.451 10.502 10.397 10.428 -0.016 10.509 10.378 7,980

Sep 10.529 10.553 10.474 10.511 -0.013 10.557 10.468 4,609