Question
A Tayside Mining (TayM) company has just discovered a small deposit of Silver. TayM estimates that it will take 4 months to prepare and construct
A Tayside Mining (TayM) company has just discovered a small deposit of Silver. TayM estimates that it will take 4 months to prepare and construct the mine; the silver will then be extracted on a continuous basis for 12 months from February 2023, with estimated output 10,000 ounces at the end of each month. The owner of TayM looks at the exchanges and would like to use Futures on Silver, available with delivery months every month from February 2023 to November 2024, with delivery date at the end of month. Each contract is for the delivery of 5,000 ounces silver.
(a) Discuss how TayM can use futures markets for hedging now.
(b) Continue with part (b). What happens to TayM if the production delays for more than a year to unforeseeable factors, after entering the contracts now? Discuss the payoffs and possible actions for TayM Note that you need to explain the futures, the payoffs of the futures, and the total positions of TayM.
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