Question

Yukon Goldrush Corp. anticipates a future sale of 50,000 oz. of gold in three months from...

Yukon Goldrush Corp. anticipates a future sale of 50,000 oz. of gold in three months from its gold mining business. Which of the following is the correct hedging strategy? Assume that gold futures prices are fair in the sense that they equal their respective no-arbitrage values.

Also assume that today is February 28 and the sale is anticipated for May 28. Currently, NYMEX has gold futures contracts listed with the following delivery months: March, April, May, and June.

Group of answer choices

Take a long position in 50 May gold futures contracts.

Take a long position in 500 May gold futures contracts.

Take a short position in 50 May gold futures contracts.

Take a long position in 500 June gold futures contracts.

Take a short position in 500 June gold futures contracts.

Take a short position in 500 May gold futures contracts.

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Answer #1

The Company anticipates to sell 50000oz of gold in 3 months. So the Company will enter into short position in futures. The contract size in each future contract is 100oz. in NYMEX thus gold future contracts are 500 Contracts (50000/100). the sale is on May 28 and the futures contract will close on third friday of the month we have to select the futures contract which is closer to the sale date which happens to be in "May" month

Thus Take a short position in 500 May gold futures contracts.

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