gold hedging

8/4/2019 Gold Hedging

1/13

GOLD HEDGING

BY- FEROZ KHAN,

RAHUL JAIN


2/13

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.


3/13

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 .


4/13

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.


5/13

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.


6/13

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.


7/13

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.


8/13

How it works:-

Barrick

Bullion Bank

Central Bank

Bullion Bank borrows gold from the Central Bank


9/13

How it works:-

Barrick

Bullion Bank

Central Bank

Spot Market

Sells the gold in the spot market


10/13


11/13

How it works

At the delivery date Barrick delivers the gold

BarrickCentral Bank

Bullion Bank


12/13

How it works

BarrickCentral Bank

Bullion Bank

Bullion Bank pays Barrick and returns the gold to the Central Bank


13/13

THANK YOU

gold hedging

Documents