Short Term Volatility
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The Gold Rush Mining Company is concerned about short-term volatility in its revenues. Gold currently sells for $300 an ounce, but the price is volatile and could fall as low as $280 or rise as high as $320 in the next month. The company will bring 1,000 ounces to the market next month.
a. What will be total revenues if the firm remains unhedged for gold prices of $280, $300, and $320 an ounce?
b. The futures price of gold for 1-month-ahead delivery is $301. 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 $300 an ounce? The puts cost $2 per ounce.
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Solution Summary
Short term volatility is discussed. The total revenues of the firms remains are determined.
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a. The gold company will sell the 1,000 ounces at the market price.
It's revenues will be 1000* the gold price.
If the price of gold is $280 it will have $280,000 in revenue
If the price of gold is $300 it will have $300,000 in revenue
If the price of gold is $320 it will have $320,000 in revenue
b. ...
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