The spot price of gold is $1500 per ounce, but the futures contract being used to hedge this position is priced at $1498 per ounce. Basis Risk Credit Risk Liquidity Risk Silverfox Productions purchases corporate bond futures anticipating a decrease in interest rates that would result in an increase in bond prices. When Silverfox Productions decides it wants to close out its futures position by selling corporate bonds futures, it can’t find anyone on the market willing to purchase the futures for what they are asking. As a result, Silverfox Productions sells the futures at a price lower than they wanted. Market Risk Operational Risk Prepayment Risk > Systemic Risk Lucent Inc. purchases eurodollar CD futures from Hamilton Bank in an OTC market. Throughout the life of the futures contract, Lucent Inc. released several new products that all failed miserably. Consequently, near the end of the futures settlement date, Lucent Inc. begins to struggle financially and files for bankruptcy, forcing them to default on their futures obligation to Hamilton Bank. Shailander Enterprises sells high-risk corporate bond futures to hedge its holdings of low-risk municipal bonds. The manager in charge of the firm’s futures positions does not fully understand how to speculate on futures, which is why he sold-high risk futures to hedge low-risk municipal bonds. Soon after the position was taken, interest rates decrease, and consequently, bond prices increase, causing Shailander Enterprises to lose millions of dollars because of the manager’s poor decision-making.


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