10) A gold mining firm extracts gold with a cost of $500 per oz. It expects to extract 9000 oz of gold in 3 months. The spot price of gold is $1700 per oz.

a. What is the 3-month futures price given interest rate is 2% p.a. and storage cost is $6 during the period, paid at the beginning of the contract. (2 marks)

b. You want to hedge against this risk using 3-month gold futures. Draw the payoff diagrams of all positions for the hedging process. (6 marks)

c. What happens if gold price surges to $2000 at maturity of the futures contract? What happens if gold price drops to $1550? Show the payoffs of all positions. (6 marks)