A foreign mine selling gold in US dollar needs to hedge Gold price risk and exchange rate risk.

The assignment requires an Excel document calculating the potential payoffs from both Gold and Exchange rate.

Show what happens with full hedging of Gold and exchange rate or a wide range of potential Spot Gold prices and Exchange spot rates.

Mine Josphine, a gold mine in Quebec, Canada, extracts an average of 750,000 grams of gold per month. They have a permanent contract to ship their monthly extractions of gold to a partner. The partner pays the spot price on shipment day.

Now, like always, the price of gold is subject to multiple small and large price variations. Even if the mine operation works perfectly, the revenues of Mine Josphine are at risk.

You want to help Mine Josphine manage their financial risks related to selling gold. The obvious financial tool is to use Futures. However, gold futures are denominated in USD (even on the Canadian ICE market). The financial obligations of Mine Josphine are all in CAD. Using gold futures can reduce significantly the price risk on gold, but introduces an exchange rate risk. This is an easy fix. You can trade CAD-USD futures to hedge the exchange rate risk.

Use the month of October as an example to present a case to Mine Josphine. Based on a monthly extraction of 750,000 grams of Gold, calculate how many October Gold Futures you need to trade to fully hedge the monthly quantity. If the quantity is not a round number, you can round down (there is an Excel formula for that.) Once you have calculated the right quantity of gold futures to trade, you will be able to predict the total cash flow in USD from selling all the gold in the month of October. Now, calculate how many CAD-USD contracts need to traded to fully hedge the exchange rate risk. Again, if the number of contracts is not a round number, you can round down.

Clearly describe the transactions in a short report to Mine Josphine. Describe the quantity and the position to take on both contracts, gold and CAD-USD.

Finally, assuming the spot price of gold at maturity would be X USD per troy ounce and the exchange rate would be Y USD/CAD, calculate the final cash flows with and without the hedges in place.

Scenario	Gold Spot Price X	Exchange Rate Y
A	1,600 USD per troy ounce	0.7575 USD/CAD
B	1,700 USD per troy ounce	0.7000 USD/CAD
C	1,800 USD per troy ounce	0.6565 USD/CAD