Canadian American Gold Inc. (CAG) has half its gold production from mines located in Canada, while the other half is from those in the United States. CAG uses a quarter of its production for making gold jewelry sold at a fixed price through stores in the two nations, and the rest is sold on the world market, where the gold price is determined in US dollars. Canadian profits are repatriated to the United States, where CAG’s headquarters are located.
CAG’s chief executive officer wants to use futures contracts to hedge the entire production of ten thousand ounces of gold and as many other transactions as possible. He communicates his desire to you but seeks your opinion one last time before the orders go out. Devise a sensible hedging strategy that would still be in line with the CEO’s wishes (assume x is the quantity used for making gold jewelry in the United States).