1. A manufacturer of gold jewelry is exposed to the price of gold in the following way: At the end of the month, if the spot price of gold is $1,500/oz, the firms profit is $1,000,000. For every $1 increase in the final spot price, the firms profit declines by $200. For every $1 decrease in the final spot price, the firms profit increases by $200.

   1. (a) Suppose the firm does not hedge its gold price exposure. Compute the firms profit for the following final spot prices of gold: ST = ($1480, $1490, $1500, $1510, $1520).

   2. (b) Suppose the firm decides to hedge its gold price exposure using two futures contracts (each futures contract is worth 100 oz. of gold) The current futures price is $1,500. What position (long or short) should the firm take? Compute the firms profit for the following final spot prices of gold: ST = ($1480, $1490, $1500, $1510, $1520).

   3. (c) Suppose the firm decides to hedge using options contracts. The firm can either buy two call options with a strike price of $1,500 and a premium of $7.50, or two put options with a strike price of $1,500 and a premium of $7.50 (each op- tion contract is worth 100 oz. of gold). Which type of option should the firm buy? Compute the firms profit for the following final spot prices of gold: ST = ($1480, $1490, $1500, $1510, $1520).

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