Fanti Goldsmiths is a manufacturer of gold rings, bracelets, and other gold ornaments. The price of gold is a significant component of its production costs. The company uses 500 ounces of gold every six months. To manage its gold price risk, the company is considering entering into a forward contract to buy 500 ounces of gold for $1000 an ounce in six months or buying a call option to buy 500 ounces of gold for $1000 an ounce in six months. The cost of the option is $100 an ounce.

a) What is the difference between the two positions under consideration?

b) Show the cost of the 500 ounces of gold as a function of the price of gold in six months for the two positions.

c) Which of the two positions would you recommend?