Chapter 01 · Section 1.1

Watchmaker Case Study - Question 1

Should the Watchmaker's treasurer buy a forward (or futures) contract to secure the company against a rise in prices?

a) No, because he could profit substantially if the prices decline.
No. Remember although he could profit substantially he will also be exposed to possible substantial loss. Our Watchmaker is very conservative. He would rather be guaranteed a small profit than to be exposed to a potentially substantial loss.
b) Yes, the Watchmaker needs a vehicle that guarantees him a fixed price of $400/oz in two months time.
c) No, the obligation to buy the gold would expose him to unnecessary price risk if he does not receive the order.