1) A gold miner expects to have 80, 000 ounces of silver gold production at end of 2023. It has concern about silver gold price may decline over the next several months. Silver price today is $23.5 per oz; the futures price for December 2023 delivery is $24.0 per ounce. Each silver contract is 5000 oz. silver. Question: 1) How many silver contacts it will need to sell to hedge the price thru year end 2023? 2) If at year end 2023, silver price declines to $23 per oz., calculate and see how the hedge works.
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1) A gold miner expects to have 80, 000 ounces of silver gold production at end of 2023. It has concern about silver gold price may decline over the next several months. Silver price today is $23.5 per oz; the futures price for December 2023 delivery is $24.0 per ounce. Each silver contract is 5000 oz. silver.
Question:
1) How many silver contacts it will need to sell to hedge the price thru year end 2023?
2) If at year end 2023, silver price declines to $23 per oz., calculate and see how the hedge works.
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- LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2020, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW's cost to produce its jewelry will increase, which would reduce its profit margins. To hedge the risk of increased gold prices, on April 1, 2020, LEW enters into a gold futures contract and designates this futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 500 ounces, and the terms of the contract give LEW the right and the obligation to purchase gold at a price of $300 per ounce. The price will be good until the contract expires on October 31, 2020. Assume the following data with respect to the price of the futures contract and the gold inventory purchase: Date Spot Price for October Delivery April 1, 2020 $300 per ounce June 30, 2020 310 per ounce September…Assume that spot gold price is trading at US$1,200 per ounce and Golden Star Resources wants to lock-in this “good” price for 3,000 ounces to be delivered in exactly a year 19th May 2021. The following assumptions applies:Spot price = US$1,200 per ounce. US 12-month cash interest rate = 5% 12-month gold lease rate (or gold borrowing fee) = 2% Banker’s profit margin = 0.5% Calculate the total price Golden Star Resources will receive on 19th May 2020 under normal circumstances.Rates for This Example Spot price = US$1,200 per ounce. US 12-month cash interest rate = 5% 12-month gold lease rate (or gold borrowing fee) = 2.5% Banker’s profit margin = 0.5% Identify the hedging instrument Golden Star Resources used to accomplish its objective. What other hedging tool can Golden Star Resources use to accomplish the same objective, and what financial position will the company take? (Mitigate price risk) Offer TWO reasons why you selected that hedging tool identified in the above…On the London Metals Exchange, the price for copper to be delivered in one year is $5,820 a ton. (Note: Payment is made when the copper is delivered.) The risk-free interest rate is 2.00% and the expected market return is 8%. a. Suppose that you expect to produce and sell 10,000 tons of copper next year. What is the PV of this output? Assume that the sale occurs at the end of the year. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) b-1. If copper has a beta of 1.28, what is the expected price of copper at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-2. Assume copper has a beta of 1.28. What is the certainty-equivalent end-of-year price?
- Suppose that you bought two one-year gold futures contracts when the one-year futures price of gold was US$1,340.30 per troy ounce. You then closed the position at the end of the sixth trading day. The initial margin requirement is US$5,940 per contract, and the maintenance margin requirement is US$5,400 per contract. One contract is for 100 troy ounces of gold. The daily prices on the intervening trading days are shown in the following table. Day Settlement Price 0 1340.30 1 1345.50 2 1339.20 3 1330.60 4 1327.70 5 1337.70 6 1340.60 Assume that you deposit the initial margin and do not withdraw the excess on any given day. Whenever a margin call occurs on Day t, you would make a deposit to bring the balance up to meet the initial margin requirement at the start of trading on Day t+1, i.e., the next day. a. What are the initial margin and maintenance margin on your margin account?Suppose that you bought two one-year gold futures contracts when the one-year futures price of gold was US$1,340.30 per troy ounce. You then closed the position at the end of the sixth trading day. The initial margin requirement is US$5,940 per contract, and the maintenance margin requirement is US$5,400 per contract. One contract is for 100 troy ounces of gold. The daily prices on the intervening trading days are shown in the following table. Day Settlement Price 0 1340.30 1 1345.50 2 1339.20 3 1330.60 4 1327.70 5 1337.70 6 1340.60 Assume that you deposit the initial margin and do not withdraw the excess on any given day. Whenever a margin call occurs on Day t, you would make a deposit to bring the balance up to meet the initial margin requirement at the start of trading on Day t+1, i.e., the next day. b. Fill the appropriate numbers in the blank cells in the following table. (Hint: See solution to Q19 in Lesson 2 Learning…Suppose that you bought two one-year gold futures contracts when the one-year futures price of gold was US$1,340.30 per troy ounce. You then closed the position at the end of the sixth trading day. The initial margin requirement is US$5,940 per contract, and the maintenance margin requirement is US$5,400 per contract. One contract is for 100 troy ounces of gold. The daily prices on the intervening trading days are shown in the following table. Day Settlement Price 0 1340.30 1 1345.50 2 1339.20 3 1330.60 4 1327.70 5 1337.70 6 1340.60 Assume that you deposit the initial margin and do not withdraw the excess on any given day. Whenever a margin call occurs on Day t, you would make a deposit to bring the balance up to meet the initial margin requirement at the start of trading on Day t+1, i.e., the next day. c. What is your total profit after you closed out your position?
- Last week, you sold a futures contract on 5,000 troy ounces of silver at a settle price of S 23.10. Today, you made delivery and the daily settle price was $23.15. What amount will you receive at the time of delivery? Assume yesterday's settle price was $23.19.The futures price of gold is $800. Futures contracts are for 100 ounces of gold, and the margin requirement is $4,000 a contract. The maintenance market requirement is $1,200. You expect the price of gold to rise and enter into a contract to buy gold. How much must you initially remit? Round your answer to the nearest dollar. $ If the futures price of gold rises to $855, what is the profit and return on your position? Round your answer for profit to the nearest dollar and for return to the nearest whole number. Profit: $ Return: % If the futures price of gold declines to $784, what is the loss on the position? Round your answer to the nearest dollar. Enter the answer as a positive value. $ If the futures price declines to $756, what must you do? Round your answer to the nearest dollar. Enter the answer as a positive value. The investor will have to $ to restore the initial $4,000 margin. If the futures price continues to decline to $740, how much do you have in your…The current spot price of gold is $1200 per ounce. The riskless interest rate is 10% per annum. For simplicity, assume there are no storage/security costs of gold. a) What is the arbitrage-free forward price for the delivery of gold in 8 month's time?
- Suppose that it is january 15 now. A copper fabricator knows it will require 100,000 pounds of copper on May 15 to meet a certain contract. So he takes a long position in the future contract. At that time the spot price of copper is 140 cents per pound and the May futures price is 120 cents per pound. Each contract is for the delivery of 25,000 pounds of copper. If the cost of copper on May 15 is 125 cents per pound, what is the effective price this copper fabricator pays per pound? a. Around 125 cents b. Around 105 cents c. Around 140 cents d. Around 120 cents e. Around 115 centsYour company has just discovered a gold deposit. It will take 6 months to begin the mining operation and it will extract continuously for 5 years. Futures contracts on gold are available with delivery every 2 months. Discuss how the futures markets can be used for hedging.Suppose a gold mining company has a short hedge on 1000 ounces of gold using futures contracts. The futures price at the initiation of the hedge was $1800 per ounce; however, 6 months later at the time of gold sale, the spot price is $1700 per ounce and the futures price is $1720 per ounce. What is the realized revenue of the gold from the short hedge? a. $1,720,000 b. $1,730,000 c. $1,740,000 d. $1,780,000