Suppose that a manufacturer has an ongoing need for silver as a raw material in the production process, and is concerned about the risk of the price of silver going up. Two hedging choices being considered are futures contracts and options.
First, explain whether this firm should
(i) buy or sell futures contracts
(ii) use call or put options and whether the firm should buy or sell them.
Second, discuss the advantages and disadvantages of hedging using options as compared to futures contracts.