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Monetizing Gold Futures to Protect Asset Value

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 protect your asset value?

In the following scenario, we look at one example of protecting asset value by using gold futures.

Simon has 1kg (1000g) of gold coins collected over the years. He observes that gold prices have declined and anticipates a further downtrend. He wishes to hold on to his physical gold portfolio for his retirement. To protect his asset value, he can use BMD Gold Futures(FGLD) contract in the following manner:

Quantity of Gold: 1000g
Current Gold Price: MYR 130 per gram

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

STEP 1:

Evaluate portfolio value
= MYR130,000
(MYR 130 x 1000g)

 

STEP 2:

Evaluate hedging amount
= 10 FGLD contracts
(100g = 1 FGLD contract, 1000g = 10 FGLD contracts)

 

STEP 3:

Execute the FGLD order with the broker
Sell 10 FGLD contracts at the current price of MYR 130
Assuming gold prices fall to MYR 100 per gram

 

STEP 4:

(a) Re-evaluate portfolio value
= MYR 100,000
(MYR 100 x 1000g)

 

Gross Loss (physical gold value)
= (MYR 30,000)
MYR 130,000 – MYR100,000)

 

(b) Gross Profit on FGLD
= MYR30,000*
((MYR130 − MYR 100) × 1000g)
(Sell 10 FGLD contracts at MYR130, Buy 10 FGLD contracts at MYR100)

 

By using the above example, Simon maintains the value of his gold coins in the event of downward price movement.

* 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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