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Answer: c) Long December 2013 contracts
The manufacturer will **buy silver in November 2013**, so it needs a **long hedge**. To reduce basis risk, the futures contract should have a delivery month that is **as close as possible to the exposure date**, but not earlier than the exposure if possible. - **September 2013** expires before November 2013, so it is not the best choice. - **December 2013** is the closest available delivery month after November 2013. Therefore, the best hedge is to **go long December 2013 futures contracts**. **Correct answer: C**
Author: Manit Arora
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Q-152.4 A manufacturer will need to purchase a certain quantity of silver in over two years in November 2013. The company wants to hedge with silver futures contracts where the specified delivery months are January, March, May, July, September, and December. Which is the BEST hedge trade for the manufacturer?
A
a) Long September 2013 contracts
B
b) Short September 2013 contracts
C
c) Long December 2013 contracts
D
d) Short December 2013 contracts
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