A gold-mining firm is concerned about short-term volatility in its revenues. Gol

Question

A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently

sells for $300 an ounce, but the price is extremely volatile and could fall as low as $280 or rise as

high as $320 in the next month. The company will bring 1000 ounces to market in the next

month.

(a)

If the firm remains unhedged, what will the firm’s total revenues be for gold prices of

$280, $300, and $320 an ounce.

(b)

The futures price of gold for 1-month-ahead delivery is $301. What will be the firm’s

total revenues at each gold price if the firm enters a 1-month futures contract to deliver

1000 ounces of gold?

(c)

What will total revenues be if the firm buys a 1-month put option to sell gold for $300 an

ounce. The put option costs $2 per ounce.

Explanation / Answer

1

If the firm remains unhedged

Revenues

Gold 280: 1000*280=280000

Gold 300: 1000*300=300000

Gold 320: 1000*320=320000

2

Futures 301

Revenue will be 301000 irrespective of gold price

3

Put for 300

Revenues will be 300*1000-2*1000=298000

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.