Question

A gold mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,690 an ounce, but the price is extremely volatile and could fall as low as $1,500 or rise as high as $1,810 in the next month. The company will bring $2,000 ounces to the market next month.
a.	What will total revenues be if the firm remains unhedged for gold prices of $1,500, $1,690, and $1,810 an ounce?
			Gold price
			$1,500		$1,690	$1,810
	Total revenues		$		$	$
b.	The futures price of gold for 1-month-ahead delivery is $1,700. What will be the firm’s total revenues at each gold price if the firm enters a 1-month futures contract to deliver $2,000 ounces of gold?

			Gold price
			$1,500		$1,690	$1,810
	Total revenues		$		$	$

        

c.	What will total revenues be if the firm buys a 1-month put option to sell gold for $1,690 an ounce? The puts cost $9 per ounce.

			Gold price
			$1,500		$1,690	$1,810
	Total revenues		$		$	$

Answer 1

a.
Gold price $1,500
Total revenues=1500*2000=3000000

Gold price $1,690
Total revenues=1690*2000=3380000

Gold price $1,810
Total revenues=1810*2000=3620000

b.
Gold price $1,500
Total revenues=1700*2000=3400000

Gold price $1,690
Total revenues=17000*2000=3400000

Gold price $1,810
Total revenues=1700*2000=3400000

c.  
Gold price $1,500
Total revenues=1690*2000=3380000

Gold price $1,690
Total revenues=1690*2000=3380000

Gold price $1,810
Total revenues=1810*2000=3620000