Question

A gold mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $2,550 an ounce, but the price is extremely volatile and could fall as low as $2,510 or rise as high as $2,590 in the next month. The company will bring 1,450 ounces of gold to the market next month.

a. What will be the total revenues if the firm remains unhedged for gold prices of (i) $2,510, (ii) $2,550, and (iii) $2,590 an ounce?

b. The futures price of gold for delivery 1 month ahead is $2,560. What will be the firm’s total revenues if the firm enters into a 1-month futures contract to deliver 1,450 ounces of gold?

c. What will be the total revenues if the firm buys a 1-month put option to sell gold for $1,450 an ounce? The put option costs $113 per ounce.

Answer 1

1.
What will be the total revenues if the firm remains unhedged for gold prices of (i) $2,510
=1450*2510=3639500

2.
What will be the total revenues if the firm remains unhedged for gold prices of (ii) $2,550
=1450*2550=3697500

3.
What will be the total revenues if the firm remains unhedged for gold prices of (iii) $2,590
=1450*2590=3755500

4.
The futures price of gold for delivery 1 month ahead is $2,560. What will be the firm’s total revenues if the firm enters into a 1-month futures contract to deliver 1,450 ounces of gold?
=1450*2560=3712000

5.
=1450*(S-113)