How Can a Gold Futures Contract Be Used as a Hedge

question 50

Multiple Choice

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

• A) The computer company should sell gold futures contracts.
• B) The computer company should sell more gold futures contracts than it should buy.
• C) This is a standard business situation, which would be favorable if it were to happen, so no hedge is needed.
• D) The computer company should lower its finished product prices now in anticipation of the decrease in the price of gold inputs.

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Definitions:

Treasury-Bond Futures

Treasury-bond futures are futures contracts based on the future value of U.S. Treasury bonds, used to hedge against or speculate on changes in interest rates.

S&P 500 Index Futures

Financial contracts that speculate on the future value of the S&P 500 index, allowing investors to bet on the direction of the stock market.

Buy

The action of acquiring ownership in a financial asset with the expectation that its value will increase over time.

Futures Contract

A legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.