Explanation:
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.
Therefore, the best hedge is to go long December 2013 futures contracts.
Correct answer: C
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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