Assume it is 1 September 2022. Mr Walter Pinkman who is a new treasurer of WeMineGold contacts

Fantastic news! We've Found the answer you've been seeking!

Question:

Assume it is 1 September 2022. Mr Walter Pinkman who is a new treasurer of WeMineGold contacts you to discuss the company's financial risk management. WeMineGold is an Australian gold mining company producing gold in north-eastern Australia, with plans to increase its size and valuation over the next few years. WeMineGold is a growth company that has invested in developing goldfields and commenced extracting gold and gold production from its underground mines. WeMineGold's profit and loss is subject to the price change of gold which is known to be quite volatile. WeMineGold is planning to sell its output of 100,000 ounces of gold on 1 March 2023. The company regularly transacts with the

WeTradeDerivatives Bank which is also available as a counterparty of forward and option contracts with gold as an underlying asset.

Walter is considering following strategies:

Strategy A: Using forwards with the WeTradeDerivatives bank as a counterparty

Strategy B: Using options with the WeTradeDerivatives bank as a counterparty

Strategy C: Doing nothing

Walter is expecting the gold price to rise over the next six months and is hoping to find a strategy which will provide protection against unfavorable price movements while at the same time allowing to benefit from a potential gold price increase.

Following further information is available:

Profit margin is defined as (Revenue - Cost of Goods Sold) / Revenue.

The company has a target profit margin of 18%.

The cost of mining one ounce of gold is $1,350.

The spot price of gold on 1 September 2022 is $1,708 per ounce.

The risk-free interest rate for all maturities is 1.5% (cont. comp.).

Following option contracts expiring on 1 March 2023 are available (each option is on one ounce of gold):

Option Type	Strike Price	Option premium
Put Option	$1,700	$38.24
Call Option	$1,700	$58.94

Please address the following questions:

a) What would be the forward price for a contract expiring on 1 March 2023?

b) Provide an explanation (without calculations) what option contracts (puts or calls) and what positions (long or short) are suitable for the needs of the company, should the company decide to go with strategy B.