Question
A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,300 an ounce, but the price is extremely volatile and
A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,300 an ounce, but the price is extremely volatile and could fall as low as $1,220 or rise as high as $1,380 in the next month. The company will bring 1,000 ounces to the market next month. (Enter your answers in millions rounded to 2 decimal places.)
a. What will be total revenues if the firm remains unhedged for gold prices of $1,220, $1,300, and $1,380 an ounce?
Gold Price per Ounce | Total Revenue |
$1,220 | $ million |
$1,300 | $ million |
$1,380 | $ million |
b. The futures price of gold for delivery one month ahead is $1,310. What will be the firms total revenues at each gold price if the firm enters into a one-month futures contract to deliver 1,000 ounces of gold?
Gold Price per Ounce | Total Revenue |
$1,220 | $ million |
$1,300 | $ million |
$1,380 | $ million |
c. What will total revenues be if the firm buys a one-month put option to sell gold for $1,300 an ounce? The put option costs $110 per ounce.
Gold Price per Ounce | Total Revenue |
$1,220 | $ million |
$1,300 | $ million |
$1,380 | $ million |
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