Suppose you are working for a gold mining company and are responsible for risk management. Assume that your production is such that you will want to sell 40,000 Troy ounces in exactly one year. Assume that the current gold price is $ 250 per ounce, gold is expected to appreciate in value by 7 % over the next year, the gold lease rate is 2%, and the gold volatility rate is 18%. Assume also that the risk-free rate is 3%.

4. (30 points) Suppose you are working for a gold mining company and are responsible for risk management. Assume that your production is such that you will want to sell 40,000 Troy ounces in exactly one year. Assume that the current gold price is $ 250 per ounce, gold is expected to appreciate in value by 7 % over the next year, the gold lease rate is 2%, and the gold volatility rate is 18%. Assume also that the risk-free rate 1S (a) (5 points) Compute your revenue at year-end if you hedge by selling an one-year forward contract in the OTC market (b) (5 points) Compute analytically the expected price of gold in one year (c) (10 points) Compute analytically the risk-neutral probability that the gold price will be below $ 230 per ounce at the end of the year d) (10 points) Compute analytically the expected revenue from the sale of produc- tion conditional on the price of gold being below $230 per ounce at year-end