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Show calculations, and write clearly. Please submit via Blackboard. 1a. Calculate the results for a short hedge with the following information for a 15 points Time 2 producer of gold Futures Market Price per unit Cash Market Price per unit $1123 Cash or Spot price $1125 Futures price Later:6 months from now $1019 Cash or Spot price $1021 Futures price Now
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Answer #1

Short hedge is a strategy which protects the trader from loss due to decline in the price of the commodity.

Time Now Actions in the cash or spot market Actions in the futures market Buy a unit of Gold at $1123 Spot Price Sell a unit of gold at $1125 future Price Later 6 months from now Sell a unit of Gold at $1019 Spot Price Buy a unit of gold at $1021 future Price Results Loss of $4 ($1019- $1123) Profit of $4 ($1125 $1021)So here we can see that there was decline in the spot price of the commodity but we have profit in the futures thereby offsetting the loss in the spot price.

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