HEDGING - EC3070 FINANCIAL DERIVATIVES HEDGING VIA FORWARD...

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Unformatted text preview: EC3070 FINANCIAL DERIVATIVES HEDGING VIA FORWARD CONTRACTS Example 1. Hedging a Long Forward Contract. Acme Metals buys 10 Comex gold contracts at 100 ounces each for June delivery at 11.a.m Monday at a futures prices of F τ | t = $400 per ounce. They do this via the futures market and they are obliged to deposit the corresponding margin money with a the Futures Commission Merchant (FCM) who acts on their behalf. At the close of trading on Monday, the futures price settles to F τ | t 1 = $395 per ounce. On Tuesday morning, Acme metals was therefore obliged to pay to the FCM the variation margin which amounts to $(400 − 395) × 100 × 10 = $5 , 000 . Tuesday’s settlement price is F τ | t 2 = $397, Therefore, on Wednesday morn- ing, Acme metals collects $(397 − 395) × 100 × 10 = $2 , 000 . On Wednesday at 2pm, Acme offsets its position by selling 10 contracts at the futures price of F τ | t 3 = $401. This generates a payment of $(401 − 397) × 100 × 10 = $4 , 000 ....
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