Question

You were recently offered a job (i.e., a 5-year contract) with a gold producer. The company is offering a choice between two compensation schemes. Under the first scheme, you will get a salary of $100,000 per year, with the first payment occurring at the end of the first year. Under the second scheme, you will get 50 ounces of gold per year, with the first payment occurring at the end of the first year. The current price of gold is $1,900 per ounce, and gold analysts expect the price to increase at the rate of 4% per year. The risk-free rate is 2% p.a., while the storage cost for gold is 0.1% p.a. Which compensation scheme will you choose?

Answer 1