A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $300 an ounce, but the price is extremely volatile and could fall as low as $280 or rise as high as $320 in the next month. The company will bring 1,000 ounces to the market next month.
a. What will be total revenues if the firm remains un-hedged for gold prices of $280, $300, and $320 an ounce?
b. The future price of gold for delivery one month ahead is $301. What will be the firm's total revenues at each gold price if the firm enters into a one-month futures contract to deliver 1,000 ounces of gold?
c. What will total revenues be if the firm buys a one-month put option to sell gold for $300 an ounce? The put option costs $2 per ounce.