A gold mining firm is concerned about short-term volatility inits revenues. Gold currently sells for $2,300 an ounce, but theprice is extremely volatile and could fall as low as $2,250 or riseas high as $2,350 in the next month. The company will bring 1,200ounces of gold to the market next month.
a. What will be the total revenues if the firm remains unhedgedfor gold prices of (i) $2,250, (ii) $2,300, and (iii) $2,350 anounce?
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| | | | | i. | At $2,250 an ounce | Â Â | | ii. | At $2,300 an ounce | | | iii. | At $2,350 an ounce | |
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b. The futures price of gold for delivery 1month ahead is $2,320. What will be the firm’s total revenues ifthe firm enters into a 1-month futures contract to deliver 1,200ounces of gold?
c. What will be the total revenues if the firmbuys a 1-month put option to sell gold for $1,200 an ounce? The putoption costs $108 per ounce.
