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?
- Shares in the SPDR Gold Trust ETF
- A gold future, marked to market daily
- 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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