Goldmines Inc.(fictitious name)makes a pretax profit of $150 million when gold prices increase (which happens with probability 0.5)but zero otherwise.Alternatively,the company can hedge with gold futures and have a known profit of $70 million.
-Assuming a tax rate of 30 percent,the expected after-tax profit for an unhedged firm and the after-tax profit for a hedged firm,respectively,are:

Question

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The expected pretax profit for the unhedged firm is $75 million (0.5 * $150 million). After tax, this is $52.5 million (70% of $75 million). The hedged firm has a known profit of $70 million, which after tax is $49 million (70% of $70 million).