You will acquire 2,000,000 troy ounces of at the prevailing market price on July

Question

You will acquire 2,000,000 troy ounces of at the prevailing market price on July 15,2016 for your long term business partner. But you are worried about the uncertainty of the market price in the future. Hence you decide to use Globlex silver feature contract to hedge your risk. You will place an order of silver feature contracts to hedge risk. You will place an order of silver features contacts at the last day closing price of the date when you enter into the feature contracts.

1. Which month maturity do you use?

2. State the date you enter into the silver futures contract and the futures price(last closing price) that you have determined ?

Use this site for reference http://www.cmegroup.com/trading/metals/precious/silver.html

Explanation / Answer

Answer

Answer 1

When you trade in futures contracts, you do not give or take immediate delivery of the assets concerned. This is called settling of the contract. This usually happens on the date of the contract’s expiry. However, many traders also choose to settle before the expiry of the contract.

On Expiry

In this case, the futures contract (purchase or sale) is settled at the closing price of the underlying asset as on the expiry date of the contract.

Before Expiry

It is not necessary to hold on to a futures contract till its expiry date. In practice, most traders exit their contracts before their expiry dates. Any gains or losses you’ve made are settled by adjusting them against the margins you have deposited till the date you decide to exit your contract. You can do so by either selling your contract, or purchasing an opposing contract that nullifies the agreement. Here again, your profits will be returned to you or losses will be collected from you, after adjusting them for the margins that you have deposited once you square off your position.

You will acquire 2,000,000 troy ounces of at the prevailing market price on July 15,2016 and Settlement date of July 2016 silver futures contract is 27 July 2016. So you should use July month maturity.

Answer 2

State the date you enter into the silver futures contract and the futures price(last closing price) that you have determined ?

The date you enter into the silver futures contract is 22 April 2016.The futures price(last closing price) that you have determined is 16.950

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