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It’s September 2015 and American Barrick (AB) wants to hedge sales of 300,000 ounces of gold...

It’s September 2015 and American Barrick (AB) wants to hedge sales of 300,000 ounces of gold projected to be produced by its Eldorado mine over the 6 months December 2015 – May 2016. They expect to produce 50,000 ounces per month. Gold futures contracts are available, and to avoid the contracts’ delivery requirements, it will hedge using January 2016 – June 2016 gold futures (January for December sales, etc.). One futures contract is for 100 ounces, and initial margin requirements are 5060 per contract. Spot price for gold today is 1098, while futures prices today for these 6 contracts are 1101, 1102, 1103, 1104, 1105, and 1106, respectively.

a) How many contracts are needed for each month? Long or short?

b) What is the total margin requirement?

c) Consider December gold sales. Assuming the January contracts are offset (closed) when the futures price is 1110, and gold spot is 1111, what will AB receive net per ounce for the December sales?

Solutions

Expert Solution

Answer Part A and B

The company will go short on future contract to lock in future prices. The number of contract and margin requirement is as follows:

Answer Part C:

To square off future position, the company will go long on the future position initially entered into and sell gold in spot market. The calculation is as follows:

jeff jeffy answered 2 years ago
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