For each of the following statements indicate whether the statement is true or false and explain why.
a) A speculator believes that the price of gold is expected to rise from its current spot price of USD 1,300 per ounce. In order to speculate using futures contracts the speculator should buy (or go long) futures contracts on gold.
b) A wheat farmer has planted her wheat and expects to harvest the wheat in two months’ time. However, she has recently become concerned that the wheat price is falling and she wishes to hedge against the price of wheat falling further before she harvests the wheat.
In order to hedge this exposure using futures contracts, the farmer should buy (or go long) futures contracts on wheat.
c) With the wedding season fast approaching in India a jeweler in concerned that the price of gold will rise significantly over the next few weeks. The jeweler can better hedge this exposure by buying gold in the spot market rather than buying gold futures contracts.
d) Buying a call option on shares is risky because it commits the option buyer to purchasing the shares at a later date. At that time owning the shares may be undesirable. Therefore, buying a call option is a risky proposition.
e) Selling a call option on shares is risky because it commits the option seller to selling the shares at a later date if the call buyer exercises its option. Therefore, selling a call option is a risky proposition.