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Golddiggers is a gold - mining firm planning to mine and sell 1 0 0 , 0 0 0 ounces of gold over the next
Golddiggers is a goldmining firm planning to mine and sell ounces of gold over the next year. The fixed cost is $oz and variable cost is $oz The management makes the following forecasts for gold price in one year: $ $ $ and $ Answer the following questions. Also, do not add interest to the cost of production. Adjust only the option pricespremiums for interest. Perform all analysis only for one ounce of gold. a Construct a table showing Golddiggerss unhedged profitoz for different prices at expiration. Note that the total cost is the fixed costoz plus the variable costoz points b Suppose Golddiggers is interested in hedging the price risk by entering into a forward contract. Should Golddiggers buy or sell the forward contract? Explain. points c Suppose Golddiggers sells a forward contract at a forward price of $oz points i How much does it cost to enter into the above short forward contract? ii Compute the profit from the short forward position and the hedged profit. Note that profit from the hedged position includes the profit from the unhedged position only long gold and the profit from the short forward position only short forward iii. What is the maximum profit potential from the hedged position? iv Draw a profit diagram for both hedged and unhedged profit.
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