The futures contract for settlement in 4 months is trading at F0 = $6.35 and the cash market is trading at S0 = $6.28. The 4-month interest rate on a continuously compounded basis is 2 percent. A silver manufacturer wants to lock in the purchase price of silver in 4 months. What are the two ways that the manufacturer can hedge and which is better? Show the price that can be locked in each way. Buying in the cash market is better. If the investor buys now in the cash market the theoretical future price locked-in is 6.322 while going long a 4-month forward price locks in a price of $6.35. Being long in the futures market is better. If the investor buys now in the cash market the theoretical future price locked-in is 6.322 while going long a 4-month forward price locks in a price of $6.35. Buying in the cash market is better. If the investor buys now in the cash market the theoretical future price locked-in is 6.335 while going long a 4-month forward price locks in a price of $6.322.
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