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.
Remember the Watchmaker's treasurer is uncertain whether he will need to purchase the additional gold.