You = gold producer, worried about the gold prices in the future. In May , you buy six September gold futures contracts (short position) of 100 ounces each, with an exercise price of $860.00 per ounce. Ignore transaction costs.
i) profit/loss be for your entire position, if gold prices turn out to be $900 per ounce at expiration?
ii) profit or loss be for your entire position if gold prices turn out to be $820 per ounce at expiration?
iii) Based on your answer to question (i) and (ii) were you right or wrong to get the future contract? What is the main benefit you get from hedging your selling price?
iv) What would the profit or loss be for your entire position if you had a put option, instead of a futures contract, with a strike price of $860 per ounce, and the price turns out to be $900 per ounce at expiration?
v) State one advantage and one disadvantage of an option contract when compared to a futures contract?