Question
A gold mine will produce 2,000 pounds of gold next year and 1,500 pounds in two...
A gold mine will produce 2,000 pounds of gold next year and 1,500 pounds in two years (assume for simplicity that the gold will be available at the end of the year). After that, the mine will be closed forever. Suppose for simplicity that there are no operating expenses. The forward price of gold delivered one year from now is $10,000/pound, and no forward market is available for delivery in two years. The risk free rate is 5% and the cost of capital for gold mines is 10%. Suppose that in the second year the price of gold is expected to be either $12,000/pound or $9,000/pound with equal probabilities.
- Find the value of the gold mine
- Suppose that the mine will be open for one year only (i.e., ignore any information for year two). Form a tracking portfolio for the gold mine and value the mine in this case.
Can you please show all the calculations, thank you
Homework Answers
Answer #1
Calculation is given in the below attached image
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