A gold mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,940 an ounce, but the price is extremely volatile and could fall as low as $1,850 or rise as high as $2,090 in the next month. The company will bring $3,000 ounces to the market next month. | ||||||
a. | What will total revenues be if the firm remains unhedged for gold prices of $1,850, $1,940, and $2,090 an ounce? | |||||
Gold price | ||||||
$1,850 | $1,940 | $2,090 | ||||
Total revenues | $ | $ | $ | |||
b. | The futures price of gold for 1-month-ahead delivery is $1,950. What will be the firm’s total revenues at each gold price if the firm enters a 1-month futures contract to deliver $3,000 ounces of gold? |
Gold price | ||||||
$1,850 | $1,940 | $2,090 | ||||
Total revenues | $ | $ | $ | |||
c. | What will total revenues be if the firm buys a 1-month put option to sell gold for $1,940 an ounce? The puts cost $5 per ounce. |
Gold price | ||||||
$1,850 | $1,940 | $2,090 | ||||
Total revenues | $ | $ | $ | |||
a.
Gold price $1,850
Total revenues=1850*3000=5550000
Gold price $1,940
Total revenues=1940*3000=5820000
Gold price $2,090
Total revenues=2090*3000=6270000
b.
Gold price $1,850
Total revenues=1950*3000=5850000
Gold price $1,940
Total revenues=1950*3000=5850000
Gold price $2,090
Total revenues=1950*3000=5850000
c.
Gold price $1,850
Total revenues=1940*3000=5820000
Gold price $1,940
Total revenues=1940*3000=5820000
Gold price $2,090
Total revenues=2090*3000=6270000
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