Should the company buy a call on gold or a put on gold

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Reference no: EM131884097

Newmont Company is gold mining firm in Ghana. The company sells over 60 thousand ounces of gold in a year. The current price for an ounce of gold is $1000. However, in the next coming months, the company expects gold prices to fall. The company decides to use options to hedge against volatility in its cash flows. The strike price for an ounce of gold for three months contract is $980. The premium for entering into the options contract is estimated at $5 per an ounce of gold. The company decides to enter into an options contract with a writer. Use the information above to answer the questions bellows

i. Should the company buy a call on gold or a put on gold? Explain

ii. Draw the payoff diagram depicting the information

iii. If the spot price of an ounce of gold at the end of the three months maturity is $1000, will the option be exercised? Explain your answer

iv. Assuming the spot price at the end of three months maturity $950, what will be the profit/loss for Anglogold Ashanti if it enters into the option contract to sell 4000 ounces of gold?

Reference no: EM131884097

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