A gold-mining firm is concerned about short-term volatility in its revenues. Gol

Question

A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,597 an ounce, but the price is extremely volatile and could fall as low as $1,517 or rise as high as $1,677 in the next month. The company will bring 1,000 ounces to the market next month. What will be total revenues if the firm remains unhedged for gold prices of $1,517, $1,597, and $1,677 an ounce? The futures price of gold for delivery one month ahead is $1,607. What will be the firm’s total revenues at each gold price if the firm enters into a one-month futures contract to deliver 1,000 ounces of gold? What will total revenues be if the firm buys a one-month put option to sell gold for $1,597 an ounce? The put option costs $113 per ounce.

Explanation / Answer

Price level $ per ounce 1517 1597 1677 Total revenues if unhedged-$ 1517000 1597000 1677000 Revenues with futures @ $1607 1607000 1607000 1677000 Revenues wih put option @ $1597: amount realised for gold 1597000 1597000 1677000 less: option price paid @ $113 113000 113000 113000 net amount realised 1484000 1484000 1564000

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