Metal Mining Company Case Study: Metal Mining Ltd
Executive Summary
Metal Mining Limited (MML) is an Australia mining company. It faces many types of risks such as, interest rate risk which affects both the syndicated bank loan and variable rate debt. Exchange rate risk affects the repayment of the variable rate debt. The price risk associated with production of gold and copper. MML can mitigate and reduce these risks by entering into the future contracts and options. Future contract or option is suggested for MML who wants to hedge 50% of the production of gold and copper in March and April. In order to meet MML's management request of low options premium payment, MML is advice to use put bear spread and strangle as their options combination strategy.
1.0 Introduction
Metal Mining Ltd (MML) …show more content…
Future contracts is a way to hedge against volatile price changes. MML will enter into a March future contracts to buy it at a lower price to reduce its risk. As for options, it is recommended for MML to use put options. The type of options that MML uses are American put options.
Total copper production for March and April = 600,000 pounds + 700,000 pounds
= 1,300,000 pounds
MML wished the hedge fifty of the production = 1,300,000 pounds x 50%
= 650,000 pounds
Contract Size for Future copper contract One future contract = 25,000 pounds
Contract Size for Options copper One option contract = 25,000 pounds
Number of futures and option contracts that would be required = P/(A)
= 650,000 pounds / 25,000 pounds
= 26 contracts
The contract Month used (Futures) March
The contract Month used (Options) March
Justification: Since two quarters of the production are provided December and March. MML would want to hedge the production in March, to prepare for price increase in the future. One would recommend MML to enter into a March future or options contract. As it allows MML to enter into a contract in the future to buy it at a price at set
Metal Mining Limited (MML) is an Australia mining company. It faces many types of risks such as, interest rate risk which affects both the syndicated bank loan and variable rate debt. Exchange rate risk affects the repayment of the variable rate debt. The price risk associated with production of gold and copper. MML can mitigate and reduce these risks by entering into the future contracts and options. Future contract or option is suggested for MML who wants to hedge 50% of the production of gold and copper in March and April. In order to meet MML's management request of low options premium payment, MML is advice to use put bear spread and strangle as their options combination strategy.
1.0 Introduction
Metal Mining Ltd (MML) …show more content…
Future contracts is a way to hedge against volatile price changes. MML will enter into a March future contracts to buy it at a lower price to reduce its risk. As for options, it is recommended for MML to use put options. The type of options that MML uses are American put options.
Total copper production for March and April = 600,000 pounds + 700,000 pounds
= 1,300,000 pounds
MML wished the hedge fifty of the production = 1,300,000 pounds x 50%
= 650,000 pounds
Contract Size for Future copper contract One future contract = 25,000 pounds
Contract Size for Options copper One option contract = 25,000 pounds
Number of futures and option contracts that would be required = P/(A)
= 650,000 pounds / 25,000 pounds
= 26 contracts
The contract Month used (Futures) March
The contract Month used (Options) March
Justification: Since two quarters of the production are provided December and March. MML would want to hedge the production in March, to prepare for price increase in the future. One would recommend MML to enter into a March future or options contract. As it allows MML to enter into a contract in the future to buy it at a price at set