Wkshp6.2008 - THE UNIVERSITY OF AUCKLAND Department of...

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THE UNIVERSITY OF AUCKLAND Department of Accounting and Finance FINANCE 261 Introduction to Investments WORKSHOP 6 1. As a gold miner, you regularly sell gold. Today is 1 January and the current spot price of gold is $900 per ounce. Assume that you plan to sell one ounce of gold to a buyer on 15 June. You decide to “lock in” the total cash inflows by using futures. A gold futures contract is currently priced at $920 and matures on 15 June. In order to achieve this objective, Mr. Smith (your financial manager) suggests you short one futures contract (on 1 January). Since you trust Mr. Smith, you decide to follow his advice. Clearly explain all the transactions that you need to undertake on 1 January and 15 June. Demonstrate whether Mr. Smith’s strategy is effective in “locking in” the total cash inflows if the gold spot price can either (i) increase to $950 per ounce or (ii) decrease to $880 per ounce on 15 June. 2.
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Wkshp6.2008 - THE UNIVERSITY OF AUCKLAND Department of...

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