Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 firms 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 $ $ $

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Financial Management

Authors: Brigham, Daves

10th Edition

978-1439051764, 1111783659, 9780324594690, 1439051763, 9781111783655, 324594690, 978-1111021573

More Books

Students also viewed these Finance questions