Q1. On MAR 25. 2018 an industrialist who uses gold as an input in his production line observes the gold spot price today: $1,650/ounce. The current futures prices for APR, MAY AUG and OCT of 2018 are: 1,655; 1,660; 1,675 and 1,690 respectively. The industrialist business involves 6,000 ounces of gold and will take place on MAY 25 2018. One NYMEX gold futures = 100 ounces.

1.1 The Industrialists uses a hedge ratio of: h = .8. Use a time table to show how the industrialists opens his hedge today.

n*= (0.8) [6,000/100] = 48 Futures

Date Spot Futures Market F Futures Positions

25-Mar-18 Nothing LONG 48 APR 2018 $1655/oz LONG 48 APR 2018

S= 1,650/ounce LONG 48 MAY 2018 $1660/oz LONG 48 MAY 2018

LONG 48 AUG 2018 $1675/oz LONG 48 AUG 2018

LONG 48 OCT 2018 $1690/oz LONG 48 OCT 2018

1.2 Use the same table as in 1.1 to show how to close the hedge on MAY 25 2018 and calculate the actual gold price/ounce for the industrialists if the spot and the relevant futures gold prices on MAY 25 2018 were $1,800 and $1,825 per ounce, respectively.

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