Problem 1: The world market for gold is priced in US dollars. An Australian gold producer is exposed to the gold price declining and also the AUD/USD exchange rate becoming unfavourable.
i) Discuss the pros and cons of using a rolling (stacking) futures hedge versus a strip futures hedge of the currency exposure.
ii) How might uncertainty over the size of the gold reserves and rate of production impact the decision to hedge the gold price?
Problem 2: Hedgers are the only legitimate users of futures markets. Arbitrageurs and speculators are parasites that profit at their expense, and contribute nothing. Discuss.