A Canadian gold mining company, anticipating a future sale of 10,000 ounces of gold in six months, wants to protect against a potential decline in gold prices. The current spot price is $2,000 CAD per ounce. Which hedging strategy would be most suitable for this company?

Question: A Canadian gold mining company, anticipating a future sale of 10,000 ounces of gold in six months, wants to protect against a potential decline in gold prices. The current spot price is $2,000 CAD per ounce. Which hedging strategy would be most suitable for this company?

Answer options:

• Buy 10,000 long call options on gold with a strike price of $2,000 CAD.
• Sell 10,000 put options on gold with a strike price of $2,000 CAD. ✅ Sell 10,000 futures contracts for gold with a delivery price of $2,000 CAD.
• Buy 10,000 shares of a gold ETF.

Correct answer: Sell 10,000 futures contracts for gold with a delivery price of $2,000 CAD.

Explanation: To hedge against a price decline for a future sale, the company needs to lock in a selling price. Selling futures contracts allows them to fix the selling price of their gold, protecting against future price drops.