gold hedging
Post on 07-Apr-2018
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GOLD HEDGING
BY- FEROZ KHAN,
RAHUL JAIN
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WHY GOLD HEDGING???
The original reason gold mines used gold hedging was
to protect a portion of their cash flow in the event that
the gold price dropped without warning. This way they
could still pay their operating expenses.
Gold mines use to hedge 10% of their annual gold
production however, in recent times some major gold
mines have hedged as much as 300% of their annualgold production.
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Hedging Instrument
Spot deferred forward Contracts (90%).
The spot deferred contract is a commitment by the
producer to deliver a fix amount of gold to the contractcounterparty at a time in the future at a fixed price.
The forward price of the contract is based on thespot price on the date of the contract plus a
premium .
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CONTD..
The difference between a spot deferred contract and
a simple forward contract is that the spot deferred
contract can be rolled over into a new contract on
delivery date.
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FEATURES :-
The gold producer is not subject to any margin calls
regardless of the price of gold.
The gold producer has the right to accelerate the
delivery of gold at any time during the life of itscontracts. This flexibility is demonstrated by theterms which allows to close out hedge contracts atany time on two days notice.
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Barricks trading agreement also specifies that the
counter parties can opt for early close out of theircontracts in the event of:
A material and lasting impact on Barricks ability to
deliver gold.
The counterparties being unable to borrow gold tofacilitate the forward contracts.
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How It Works
Barrick enters into the spot deferred contract with the Bullion Bank.
Barrick
Bullion Bank
Central Bank
Barrick enters into the spot deferred contract with the Bullion Bank.
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How it works:-
Barrick
Bullion Bank
Central Bank
Bullion Bank borrows gold from the Central Bank
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How it works:-
Barrick
Bullion Bank
Central Bank
Spot Market
Sells the gold in the spot market
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How it works
At the delivery date Barrick delivers the gold
BarrickCentral Bank
Bullion Bank
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How it works
BarrickCentral Bank
Bullion Bank
Bullion Bank pays Barrick and returns the gold to the Central Bank
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THANK YOU
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