Question
Question 3 . In is January. The operation manager of a new mining company reviews its platinum production plans. The production forecasts suggest that the
Question 3. In is January. The operation manager of a new mining company reviews its platinum production plans. The production forecasts suggest that the company will have 20,000 ounces of newly mined and refined platinum available for sale the following June. The manager considers the current price of the July platinum futures contract at $1,132.80 per ounce favourable, given the companys total production costs, including interest and depreciation, of $980 an ounce. As a result, on January 28, the mining financial manager decides to lock in a profit by hedging his anticipated production using the July platinum futures contract at $1,132.80 per ounce. On January 28, the spot price is $1,121.31 per ounce. The contract size is 50 troy ounces on the CME Group.
- Indicate whether the financial manager should use a long or short forward contract to hedge the risk exposure. How many contracts are needed for a full hedge?
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