A gold mining firm sells futures contracts worth 1000 ounces at a price of $800 per ounce for maturity one year from today.If gold futures prices decrease to $798 per ounce,what is the cash flow to the producer?
A)-$2000
B)$2000
C)$0
D)$800,000
E)$798,000

Question

Quizplus · Accepted Answer

The producer has locked in a price of $800 per ounce for 1000 ounces, so they will receive $800,000 regardless of the market price. The cash flow is the difference between the locked-in price and the market price, which is $2 per ounce for 1000 ounces, resulting in a cash flow of $2000.

A Gold Mining Firm Sells Futures Contracts Worth 1000 Ounces