A US gold mining company plans to sell 200 ounces in September 2020. Gold futures for delivery in October 2020 are currently priced at $1,760.50 per ounce on COMEX for the delivery of 100 ounces. The current spot price is $1,734.41. The company has a view that gold spot prices might fall and wants to lock in its sales revenue.

a) Explain how many contracts the company should buy or sell to hedge its risk.

b) The company closes out the futures position in September at which time the futures price is $1,240 and the spot price is $1,250. What is the profit for the company from the hedge and what is its overall profit?

c) What is the basis at t=1 and t=2? Explain how basis risk affects the performance of the hedge.