It is July 2014. A mining company has just discovered a small deposit of gold. It will take six months to construct the mine. The gold will then be extracted on a more or less continuous basis for one year. Futures contracts on gold are available with delivery months every two months from August 2014 to December 2015. Each contract is for the delivery of 100 ounces.

1. a) Discuss how the mining company might use futures markets for hedging?

2. b) Under what conditions should the mining company not hedge the future selling price risk?