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

A jewelry maker wants to lock in the price of gold it will purchase in six months. Which position in gold futures best achieves this objective?

The jewelry maker should take a long position in gold futures expiring around the purchase date. If gold prices rise, gains on the futures offset the higher cost of buying physical gold, so the effective purchase price is locked in. Short futures would hedge a seller instead.

  1. AShort gold futures expiring in six months
  2. BLong gold futures expiring in six monthsCorrect
  3. CLong a put option on gold futures only
  4. DShort gold futures expiring in one month

Explanation

A buyer of a commodity in the future faces the risk of rising prices. Going long futures gains when prices rise, offsetting higher purchase costs. A short position would add to the loss if prices rise, so it is a hedge for a producer, not a buyer.

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