| Case |
Hedger (producer) |
Hedger (user) |
Speculator |
DECEMBER
Cash Market gold $700oz
June Contract gold $725oz
|
Gold producers hedege by selling futures contracts. The producers plan to sell gold in June, and want to protect against a drop in prices. So, they enter a contract obligating a delivery in June at an acceptable profit point. |
Gold users hedege by buying futures contracts. The users plan to buy gold in June, and want to protect against a rise in prices. So, they enter a contract obligating a purchase in June at an acceptable price point. |
Gold sepculators buy June futures contracts, believeing the price of gold will rise. |
MARCH
Cash Market gold $733oz
June Contract gold $737oz
|
Producers do nothing, their contract is for June |
The users do nothing, their contract is for June |
Speculators believe gold has reached the peak in prices, and sell.
| Price at March sell |
$737 |
| Cost of December buy |
$725 |
| RETURN |
$12 per oz |
|
JUNE
Cash Market $675
June Contract $677
|
Because the price of gold has dropped below contract value, the producers profit off the trade.
| December Sell |
$725 |
| June Buy |
$677 |
| RETURN |
$48 per oz |
Producers sell their gold in the cash market at $675, and then trade their futures contracts to make up the difference.
| Cash Market sell |
$675oz |
| Futures trading profits |
$48 |
| GROSS PROFIT |
$723 |
|
Users lose money on the futures trades.
| Earned in June futures sell |
$677oz |
| Cost of Buy contract bought in December |
-$725oz |
| RETURN |
-$48 |
Since the cost of gold was below expected costs, the total cost was close to the $725 cost anticpated in December
| Cost in cash market |
$675 |
| Loss in futures trade |
+$48 |
| Total cost to user |
$723 |
|
Speculators exited the market in March |
