A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $650 an
Question:
A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $650 an ounce, but the price is extremely volatile and could fall as low as $630 or rise as high as $680 in the next month. The company will bring 1,000 ounces to the market next month.
a. What will be total revenues if the firm remains unhedged for gold prices of $600, $630, and $680 an ounce?
b. The futures price of gold for delivery one month ahead is $660. What will be the firm’s total revenues at each gold price if the firm enters into a one-month futures contract to deliver 1,000 ounces of gold?
c. What will total revenues be if the firm buys a one-month put option to sell gold for
$650 an ounce? The put option costs $45 per ounce.
AppendixLO1
Step by Step Answer: