Question
In February, an official of the new mining venture reviews the companys most recent gold production plans. The sales and production projections suggest that the
In February, an official of the new mining venture reviews the companys most recent gold production plans. The sales and production projections suggest that the company will have 3,000 troy ounces of newly mined and refined gold available for sale the following July. The executive considers the current price of the August gold futures contract at $1,310.20 favorable, given the companys total production costs of $1,180 an ounce. As a result, the mining executive decides to lock in a profit by hedging his anticipated production. Each contract is for delivery of 100 troy ounces of gold.
- Explain how this firm can hedge its position against adverse price movements?
Suppose that on July 13th the gold becomes available for sale (hedge expiration date). The spot price of gold on that day is $1,340.2 per ounce and the futures price of the August contract is $1,348 per ounce (note: the basis <0).
- How does the firm close out (offset) its position? (list the steps, prices, position)
- How much does this firm receive in total for the gold contract that it entered into (including the final adjustments to the margin account)?
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