A gold mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,450 an ounce, but the price is extremely volatile and could fall as low as $1,330 or rise as high as $1,650 in the next month. The company will bring 1,000 ounces to the market next month.
a. What will total revenues be if the firm remains unhedged for gold prices of $1,330, $ 1,450, and $ 1,650 an ounce?
b. The futures price of gold for 1-month-ahead delivery is $1,460. What will be the firm’s total revenues at each gold price if the firm enters a 1-month futures contract to deliver 1,000 ounces of gold?
c. What will total revenues be if the firm buys a 1-month put option to sell gold for $1,450 an ounce? The puts cost $5 per ounce.
