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Question of the Week - Alternative Investments

AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
edited September 2015 in Level 1 Questions
You are in the business of designing custom jewelry. You buy gold as a raw material but keep very little gold as inventory. Profits the past few years have been volatile, with one variable being the price of gold. Which of the following long positions would be least appropriate to hedge against the increase in gold price?
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Question of the Week - Alternative Investments 21 votes

Shares in the SPDR Gold Trust ETF
28%
jmsatchwellArsenalFangstylenilsenp06henryb1Lyn 6 votes
A gold future, marked to market daily
19%
ajnoakesUdigiuliopaulopitaRichie321 4 votes
An option to sell gold at $2,000, 4 months from now
52%
AdaptPreprsparksabhishekroy3112CFAI_wont_stop_meYeshankYannickTsaue1436kevtivTheClawclangerhAlaric 11 votes

Comments

  • AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
    An option to sell gold at $2,000, 4 months from now

    Since gold is an input, you would want to hedge future price increases. As the price goes up, your costs go up, and your margins are squeezed. If the price goes down, you are fine.

    To hedge against gold price increases, you would want a position that pays off if gold price increases. The option to sell gold will pay off as prices go down, not up. That is opposite to the position you want to take.

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