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Da Players’ Gold Store

Da Players’ Gold Store. Where we sell gold cheap….real cheap!!!!. Colin Dunn Mike Gaffney Mike Oberdorf. Our business has agreed to take shipment of 35,400 ounces of gold on April 1 , 2000 At present, the price for this gold is approximately $10 million dollars

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Da Players’ Gold Store

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  1. Da Players’ Gold Store Where we sell gold cheap….real cheap!!!! Colin Dunn Mike Gaffney Mike Oberdorf

  2. Our business has agreed to take shipment of 35,400 ounces of gold on April 1, 2000 At present, the price for this gold is approximately $10 million dollars Our worry is that the gold price will drop and thus decrease the value of our shipment Business Problem

  3. For the past ten years, gold funds have averaged an annual loss of 5% The overall trend is that the price of gold is falling although there have been sudden unexpected spikes in the price We foresee that the price of gold will be significantly more volatile than the market with a possibility for a large decline Therefore, the value of the gold we will receive will decline relative to forward Market View: Gold Prices

  4. Position: Long Gold (+F) On April 1, 2000, we will receive 35,400 ounces Being risk averse, we will hedge our position Business Risk

  5. 6-Month Gold Prices

  6. We will use a risk premium estimate of 2% Risk premium estimates for gold have been seen as high as 5.5%, but this estimate is based on the years 1961-91 which included periods of high inflation It does not take into account the 1990s where gold did not perform well We believe that the most recent performance of gold prices is more indicative of future prices and therefore are using the 2% risk premium Risk Premium Estimate

  7. Futures Maturity Date: April 1, 2000 Options Maturity Date: March 10, 2000 The options on the futures contracts matures before the actual futures contracts settle Therefore, we must make our decision about hedging our position on March 10 when the options mature Maturity Date Differences

  8. Value at Risk

  9. We are looking to structure our position so that we only have a 5% chance of losing more than 10% (or $1,000,000) To structure this position using only futures contracts, we will short 178 contracts which will leave our net position at 176 contracts long Value at Risk (cont’d)

  10. We have also identified several options positions that can be used to hedge our position The next several slides evaluate the different strategies and how to make sure that we don’t get our face RIPPED OFF!!! Options Positions

  11. Options Premiums

  12. Position 1: No Risk Position

  13. Position: +F –F View: Unsure, Risk Averse Pro: No Risk Same price as +F +P280 –C280 Con: No Return Bottom Line: No Fun! Evaluation of No Risk Position

  14. Position 2: Bear Spread

  15. Position: +F +Pitm –Citm View: Limited down, (concern big up) Pro: Makes money atm Insures against Volatility Con: Fails to capitalize on big down Decision: Low maximum loss but not completely in line with downward view. Evaluation of Bear Spread

  16. Position 3: Long Strangle

  17. Position: +F +Potm +Pitm View: Volatile (Neutral but slight bias downward) Pro: Unlimited Gain Limited Loss Less expensive than +F +Potm +Pitm Con: Expensive Decision: Largest loss within range of volatility Evaluation of Long Strangle

  18. Position 4: Long Straddle

  19. Position: +F +Pitm +Pitm View: Volatile, (Neutral, bias downward) Pros: Unlimited Gain Limited Loss Less Expensive than +F +2Pitm Con: Costly Decision: Lowest possible loss within range, biased towards market expectation Evaluation of Long Straddle

  20. Position 5: Synthetic Long Put

  21. Position: +F +Pitm +Pitm –Cotm View: Down, Unsure (More sure relative to atm) Pro: Limited Downside Unlimited Upside Cons: Given recent volatility considerable potential for loss Decision: Takes advantage of our view but risky considering volatility. Evaluation of Synthetic Long Put

  22. Position 6: Synthetic Long Put itm

  23. Position: +F +Pitm +Pitm +Pitm –Citm View: Down, (Less unsure than atm) Pro: Limited downside Unlimited Upside Con: Given recent volatility considerable potential for loss Decision: Maximizes our return based on our view but potential for loss given vol. Evaluation of Synthetic Long Put itm

  24. The Long Straddle capitalizes on our view that the price of Gold will be volatile with a bias downward. The second of the two synthetic long puts is also attractive because it fits within our acceptable loss range while maximizing our upward potential given our bias downward. However it is slightly risky because any upward movement results in a significant loss. Recommendation

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