1. Shining Rock Mining is a gold-mining firm that is concerned about controlling the volatility of its revenues. The current price of gold is $325 per ounce, but over the past year it has traded for as little as $250 and as much as $375. These price swings have been known to occur in as little as one month. Shining Rock expects to have 5,000 ounces of gold available for sale over the coming month.
a. If Shining Rock does not hedge these sales, what is the maximum amount of total revenue they could hope to receive based on prices over the past year? What is the minimum amount of total revenue they could hope to receive?
b. The futures price for gold delivered in one month is $327. If Shining Rock sells its gold in the futures market, what will be its total revenue?
c. If Shining Rock buys a put option to sell gold in one month at $327, and the put option costs $3 per ounce, what will its total revenues be?
2. Independence Airline anticipates the need to buy 1 million gallons of jet fuel in 3 months. The current price of jet fuel is $0.60 per gallon. The 3-month futures price for jet fuel is $0.62 per gallon. Independence is concerned that unrest in the Middle East could cause the price of jet fuel to rise well above $0.62. If the price of jet fuel actually increases to $0.75 over the next 3 months, compare the company's cost of jet fuel if it remains unhedged versus the cost if it buys jet fuel futures contracts to cover its jet fuel purchases in 3 months.