Suppose you take a job with a mining company in Nevada. Your boss expects to produce 8,000
Question:
Suppose you take a job with a mining company in Nevada. Your boss expects to produce 8,000 troy ounces of gold in November and is concerned that the price of gold will fall before it can be sold. She asks you the hedge the anticipated November gold sale on the futures market.
You are going to hedge this transaction using December 2020 gold futures. The contract size is 100 troy ounces. Today, the current price of gold is $2,034/troy oz and the December 2020 gold futures price is $2072/troy oz.
When November arrives and you lift your hedge, the cash price of gold is $1,897/troy oz and the December 2020 gold futures price is $1,899/troy oz.
Assume transaction fees of $15 per roundtrip per futures contract and a hedge ratio of 1.0 when answering the questions below. Round to the nearest whole number of contracts.
Did you first go long or short futures to initiate your hedge?
How many futures contracts do you trade for your hedge?
What is the gain (loss) in the futures market (after accounting for transaction fees of $15 per roundtrip)?
Enter your answer without dollar signs or commas. For a profit, enter a positive number. For a loss, enter a negative number.
What is the net outcome of the hedge in terms of $/troy oz.?
Do not enter dollar signs or commas. Please enter your answer significant to two decimal places. For example, if you believe the net outcome is a gold price of $2,112.00/oz, simply enter "2112.00"
Managerial Accounting Creating Value in a Dynamic Business Environment
ISBN: 978-1259569562
11th edition
Authors: Ronald W. Hilton