derivative instruments

Question

Would a jeweller use futures contracts written on gold? Why and how?

Answer 1

Yes, a jeweler could use futures contracts written on gold as a way to hedge against price fluctuations and manage risk. Futures contracts are financial instruments that allow buyers and sellers to agree on a price for a specific asset, in this case, gold, for delivery at a future date. A jeweler might use gold futures contracts for the following reasons:

Price risk management: As a jeweler relies on gold as a primary input for their products, they are exposed to fluctuations in the price of gold. By using futures contracts, a jeweler can lock in a price for gold at a future date, mitigating the risk of adverse price movements that could impact their profit margins.

Budgeting and cost control: By locking in the price of gold through futures contracts, a jeweler can better predict their input costs and plan their budgets accordingly. This enables them to have more control over their financial projections and make more informed decisions about their business operations.

Inventory management: Gold futures contracts can help a jeweler manage their inventory more effectively. By purchasing contracts for future delivery, the jeweler can secure gold when needed without having to hold large inventories, which can be costly due to storage and insurance expenses.