A jewelry shop “Best Gold Ever" sells 100 ounces of gold jewelry in a year for $800 per ounce. The total expenses of running their business are $35,000 per year. They decide to purchase a l-year call option with a strike price of $420 for a premium of $10 per ounce to hedge their risks. Risk free interest rate is 5%. a) Compare the shop's unhedged profit/loss vs. hedged profit/loss when the price of gold is $350 per ounce b) Compare the shop's unhedged profit/loss vs. hedged profit/loss when the price of gold is $470 per ounce

A jewelry shop “Best Gold Ever" sells 100 ounces of gold jewelry in a year for $800 per ounce. The total expenses of running their business are $35,000 per year. They decide to purchase a l-year call option with a strike price of $420 for a premium of $10 per ounce to hedge their risks. Risk free interest rate is 5%. a) Compare the shop's unhedged profit/loss vs. hedged profit/loss when the price of gold is $350 per ounce b) Compare the shop's unhedged profit/loss vs. hedged profit/loss when the price of gold is $470 per ounce

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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