Problem
You are the president of the UWA Risk Management Club. You recently got involved in a consulting task from a local resource company, Perthermo Green Coal (PGC). PGC is considering taking a few positions in ICE Newcastle Coal February 2023 futures contracts (with an expiration date on 24 February 2023). Their expected delivery date to clients in China is 30 January 2023.
The CEO of PGC has sent you a list of questions before the first formal meeting. Worrying about losing the consulting task to other elite clubs such as SMIF, QFIN and FAWA, you decide to review what you learnt in FINA2204. The list of questions is included below.
(a) Shall we long or short the futures?
(b) Why can't we stick with ICE Newcastle Coal January 2023 futures contracts?
(c) If we close our position as soon as the futures price is equal to the underlying spot price, does that mean our hedge is a perfect hedge?