Question 3 (10 marks) Scenario: Ashanti Goldfields, a West African gold-mining company based in Ghana, experienced problems resulting from its hedging program in 1999. It had sought to protect its shareholders from gold price declines by having short gold forward contracts (sell gold at specified forward price) with year-to-maturity of two to three years. On September 26, 1999, 15 European central banks surprised the market with an announcement that they would limit their gold sales over the following five years. As a result, the price of gold jumped up over 25%. Ashanti could satisfy the long position buyer with its physical gold it had mined, however, Ashanti did not have the liquidity to meet the margin calls by the banks. Ashanti's balance sheet was excessively stretched. It had over the last 5 years embarked upon a substantial capital expansion program acquired mines in Ghana, Guinea and Zimbabwe which reduced its liquidity. The rally in gold resulted in a 50 percent decline in Ashanti's' stock value. The stock price was to fall from $8.50 (a market capitalization of $890 million) to $4.62. The stock continued to plunge to a 12-month low of $3 on 6 Oct, 1999 from a peak of $10.69 in Jan, 1999. This resulted in a major restructuring, which included the sale of a mine, a dilution of the interest of its shareholders, and a restructuring of its hedge positions. Based on the scenario above, explain the hedging problems faced by Ashanti Goldfields. [10 marks]