Table I: The comparison between the American Barrick Performance under hedging and no hedging
Considering on the market without hedging program, when the price of gold changed 1 percent, the net income and cash flow from operation will be changed 3.56 percent and 1.69 percent, respectively. The net income also caused the changed in shareholder’s book value, 0.35 percent change according to 1 percent change in gold price. Therefore, if the gold price increased, it would increase the net income and shareholder’s book value. The stock will be more attractive to the investors and drive the stock price increasing. By contrary, if the gold price decreased, the shareholder’s book value would be decreased and the stock price would be decreased, also. (See table II)
Table II: The effect on 1% change in gold price
There are a lot of exposures on the gold price such as the political instability, inflation, government policy and new findings in gold mines. If there are no financial contracts such as option, forward or insurance, the firm might need to tighten the financial policies to be more conservative. In addition, the firm should improve the innovative financing techniques and instruments to prevent the financial risk. Moreover, the firm might need to consider...