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.
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.
  Yes. He is not sure whether he will have to buy the additional 1,000 oz. He should employ forwards or futures only in cases where he is certain that there will be a need for price protection. Continue

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