1. Suppose you operate a large gold distributor that sells gold to jewelry manufacturers nationwide. You have entered into a large sales contract to deliver $4,200 ounces of gold to a global customer three months from today. Your customer will pay you the market price at the time of delivery. You wish to hedge this exposure using futures contract.
How would you hedge?
a. Long, since you are concerned about gold prices dropping
b. Short, since you are concerned about gold prices dropping
c. Short, since you are concerned about jewelry prices dropping
d. None of the above
2. Referring to the previous question. Suppose you decide to hedge your gold exposure with a forward contract instead of a futures contract. What additional risk(s) are you taking on?
a. Counterparty risk
b. Liquidity risk
c. Answers A & B are both correct