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A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $300 an

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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 1,000 ounces to the market next month.

a. What will be total revenues if the firm remains un-hedged for gold prices of $280, $300, and $320 an ounce?

b. The future price of gold for delivery one month ahead is $301. What will be the firm’s total revenues at each gold price if the firm enters into a one-month futures contract to deliver 1,000 ounces of gold?

c. What will total revenues be if the firm buys a one-month put option to sell gold for $300 an ounce? The put option costs $2 per ounce.

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Gold Price Per Ounce 280 300 320 ...View the full answer


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A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

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