A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $300 an ounce, but the price is extremely volatile and could fall as low as $280 or rise as high as $320 in the next month. The company will bring 1000 ounces to market in the next month.
(a) If the firm remains unhedged, what will the firm’s total revenues be 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 1000 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 put option costs $2 per ounce.