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You work for a wholesale manufacturer of jewelry and plan on making a large purchase of silver in August to start production of jewelry for the holiday season. You are worried that the price of silver may increase and want to use the futures market to hedge the risk of a price increase. ( 10 points each)
a) Should you take a short or long position to hedge your risk?
b) Assume you take the position described in your answer in a) for 10 contracts at the Sept futures price of $15.385. In August you close out your position at a futures price of $15.45 and the spot price is $15.48. Calculate the effective price you end up paying for the 10 contracts of copper.
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