Oz Road Paving (ORP) was negotiating a contract to complete highway repairs with a local city in six months. One of the key required materials for this work is gold. The current spot price of gold is $1250 per ounce. The six-month future price of gold is $1264.
a. What gold price should ORP use as it establishes a price to quote to the city – the current price or the six-month futures price?
b. Describe a hedge using the futures market for gold that will protect ORP against potential increases in the price of gold over the coming six months.
c. How could ORP use options to hedge this risk? What types of options should be used – puts or calls?