A silver producer will have 500,000 ounce of production this year. The silver price is $19 per ounce currently, and the futures price for December 2017 is $20 per ounce. The producer is concerned of decline in silver prices this year. There are 5,000 ounces of silver in each futures contract. So it decides to sell 100 silver futures contracts that expire December 2017. 6 months later, the silver price declines to $18 per ounce.
a) What’s the short future position initially?
b) What’s the profit from the future trade as sliver price decline to $18?
c) What’s the loss of production value as sliver price decline to $18?