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Monetizing Gold Futures to Lock In The Price of Gold Before It Goes Up

Investing in gold futures can cater to a variety of traders and investors with different trading objectives and strategies. The three (3) scenarios where gold futures contract can be used are protection of asset value, locking in the price of physical gold before it goes up or even taking advantage of gold price volatility.

How can BMD Gold Futures(FGLD) help to lock in the price of gold before it goes up?

In the following scenario, we look at one example of locking in gold price before it goes up by using gold futures.

Madam Deepika’s daughter is getting married in 6 months time. She intends to withdraw her Fixed Deposit sum to buy gold jewellery. However, the Fixed Deposit is not due until closer to the wedding. Madam Deepika notices the gold prices have been trending upwards and is concerned that this may reduce the amount of gold she can purchase. To lock in the current gold price, she can use FGLD contract in the following manner:

Quantity of Gold: 200g
Current Gold Price: MYR 130 per gram
Fixed Deposit Value: MYR 26,000

This is a scenario when the physical gold prices are expected to RISE

STEP 1:

Evaluate portfolio value
= MYR26,000
(MYR 130 x 200g)

 

STEP 2:

Evaluate hedging amount
= 2 FGLD contracts
(100g = 1 FGLD contract, 200g = 2 FGLD contracts)

 

STEP 3:

Execute the FGLD order with the broker
Buy 2 FGLD contracts at the current price of MYR 130
Assuming gold prices rise to MYR 160 per gram

 

STEP 4:

(a) Reevaluate portfolio value
= MYR20,000
(MYR 100 x 200g)

 

Gross Loss (physical gold value)
= MYR 6,000
(MYR 26,000 – MYR 20,000)

 

(b) Gross Profit on FGLD
= MYR 6,000*
((MYR 160-MYR 130) x 200g))
(Buy 2 FGLD contracts at MYR 130, Sell 2 FGLD contracts at MYR 160)

 

By using the above example, Madam Deepika can then add the profit to her Fixed Deposit sum and purchase the same amount of gold that she originally intended. By using this strategy, she effectively locked in the price of gold at the time she bought the FGLD.

* Initial Margins are to be deposited prior to trading
* Transaction costs have been excluded in this example

Text Source: Bursa Malaysia

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