This is a "commodity swap", not a hedge.
Spot price is $255 - producer sells 100,000 oz forward for delivery say in September 2001 @ $285.
Spot price in September 2001 = $345.
Producer Buys (i.e. closes) Sept.2001 contract for a loss of $345 - $285 = $60/0z X 100,000 0z = $6,000,000 loss
Producer sells 100,000 0z into spot market for $345/0z therefore proceeds = $34,500,000
Deduct loss on forward sale of $60,000 therefore net proceeds of sale = $34,500,000 - $6,000,000 = $28,500,000.
In other words the producer, by selling forward has secured his price of $285/oz = $28,500,000 divided by 100,000
WHY? because you have the producer selling in the future at a fixed price, reguardless of the RISK. There is not Keeping It Simple Stupid...
Hedging:
The primary economic function of futures markets is hedging-taking a futures position to offset risk of actually owning the physical commodity
Lawrence G McMillan
You proved why your above example is not a hedge. It doesn't offset risk.
Hutch |
