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Homework answers / question archive / You are a distributor of gold and need to make deliveries of 10,000 kilogram (kg) one month from now
You are a distributor of gold and need to make deliveries of 10,000 kilogram (kg) one month from now. You currently have no gold in inventory. The current spot price of wheat is $8 per kg and the futures price for delivery in one month is $8.2. You would like to hedge the uncertainty about the spot price one month from now. i) If your storage cost is $0.15 per kg (paid at the end of month), what would you do? (assume the monthly compound interest rate is r) (3 marks) ii) Suppose that in the short run, your storage cost increases to $0.25 per kg. What would you do? (assume the monthly compound interest rate is r) (3 marks)
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