Chapter 4 - Introduction to risk management

Question 1

how can a firm that produce some shit like gold lock in a profit?

Answer 1

Enter into a short forward position on the gold.

Question 2

if we buy a long forward contract, do we lock in constant cash flow?

Answer 2

Nuanced. We dont hedge anything because the forward in itself must be used in conjunction with something else.
For instance, if we only buy a long forward, it is true that it’s price is fixed, but whether this is beneficial or not depends on what the underlying does.

As an example, consider the prodiuction company that has the asset, and want to sell the asset. If they enter a short forward, then the asset+forward combination provide a constant cash flow.

in the case of a long forward contract, we can view it as locking in a cash flow that is considered as a cash outflow.

Question 3

Define