A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $2,100 an ounce, but the price is extremely volatile and could fall as low as $2,000 or rise as high as $2,200 in the next month. The company will bring 1,400 ounces of gold to the market next month. Question: What will be the total revenues if the firm buys a 1-month put option to sell gold for $1,400 an ounce? The put option costs $48 per ounce.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $2,100 an ounce, but the price is extremely volatile and could fall as low as $2,000 or rise as high as $2,200 in the next month. The company will bring 1,400 ounces of gold to the market next month.
Question:
What will be the total revenues if the firm buys a 1-month put option to sell gold for $1,400 an ounce? The put option costs $48 per ounce.
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