Question
Q1. On NOV 22, 2017 a Gold Trader (GT) entered several contracts as follows: Contract 1: To purchase 100,000 ounces of gold from a Gold
Q1. On NOV 22, 2017 a Gold Trader (GT) entered several contracts as follows:
Contract 1: To purchase 100,000 ounces of gold from a Gold Mining Company (GMC) on MAR 14, 2018 for the spot price on that the purchase day.
Contract 2: To sell 100,000ounces of gold on MAR 14, 2018 to Gold Jewelry Designer (GJD). The selling price will be the NOV 22, 2017 NYMEX gold for MAY 2018 delivery futures price MINUS a discount of $4/ounce or more. The discount is yet to be agreed upon between GT and GJD.
Contract 3: GT opened a hedge on NYMEX to hedge the spot trade with GMC using 1,000 NYMEX MAY 2018 gold futures, each covering 100ounces.
1.1 Use a time table and our usual notations to show all the cash flows associated with all the above contracts on NOV 22, 2017 and on MAR 14, 2018.
1.2 On NOV 22, 2017 the gold MAY 2018 futures was selling for $1,502/ounce and the spot price was $1,491.30/ounce. Describe a strategy that GT could employ that would guarantee GT a profit of $600,000, while giving GJD the discount it wanted and explained all the cash flows associated with the entire situation.
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