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FRM Part I · FRM Exam Part I · Commodity Forwards and Futures

A gold jeweler wants to lock in the purchase price of 1,000 troy ounces of gold to be delivered in six months. Which position best achieves this objective?

The jeweler should buy a six-month gold forward contract. Being a future buyer of gold, it faces the risk of rising prices, and a long forward fixes the purchase price today. Short positions or put options would not fix the cost of buying gold.

  1. ASell gold futures expiring in six months
  2. BBuy a six-month gold forward contractCorrect
  3. CBuy a six-month put option on gold
  4. DSell a six-month gold forward contract

Explanation

The jeweler is exposed to a rise in the price of gold it must buy, so it needs a long position. A long forward fixes the purchase price for delivery in six months. Selling forwards or futures would add to price exposure rather than remove it, and a put option provides downside protection for a holder of gold, not a fixed purchase price.

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