CFA CFA Level 1 Question of the Week – Alternative Investments

Question of the Week – Alternative Investments

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    • AdaptPrep

      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
    • AdaptPrep

      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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