# Question: Golddiggers has zero net income if it sells gold for

Golddiggers has zero net income if it sells gold for a price of \$380. However, by shorting a forward contract it is possible to guarantee a profit of \$40/oz. suppose a manager decides not to hedge and the gold price in 1 year is \$390/oz. Did the firm earn \$10 in profit (relative to accounting break-even) or lose \$30 in profit (relative to the profit that could be obtained by hedging)? Would your answer be different if the manager did hedge and the gold price had been \$450?
•XYZ mines copper, with fixed costs of \$0.50/lb and variable cost of \$0.40/lb.
•Wirco produces wire. It buys copper and manufactures wire. One pound of copper can be used to produce one unit of wire, which sells for the price of copper plus \$5. Fixed cost per unit is \$3 and noncopper variable cost is \$1.50.
•Telco installs telecommunications equipment and uses copper wire fromWirco as an input. For planning purposes, Telco assigns a fixed revenue of \$6.20 for each unit of wire it uses.
The 1-year forward price of copper is \$1/lb. The 1-year continuously compounded interest rate is 6%. One-year option prices for copper are shown in the table below.17
In your answers, at a minimum consider copper prices in 1 year of \$0.80, \$0.90, \$1.00, \$1.10, and \$1.20.

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