Price hedging and its value to gold producing companies

Franks, Richard Lee, 1963-
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Gold price volatility has created a market for securities based on gold price. This liquid market has afforded gold company managers an opportunity to hedge, or reduce, the risk arising from gold price movements. Typical price hedging instruments include forward sales contracts, futures contracts, options, and gold loans. The question addressed in this thesis is whether price hedging adds value to companies using it. Several areas are identified where hedging might have some effect on company value. They include cost of capital, operating costs, and investment decision making. Of these, the cost of capital appears to be most important. Hedging may result in cheaper debt, but some evidence indicates that the investor's required rate of return as calculated by the CAPM and beta is increased by hedging. If the CAPM holds, the company's market value could be reduced. The result is that companies evaluating an existing hedging policy or those considering implementing a policy have to determine individually whether hedging pays off. Recognizing the possible detriment to company value and knowing the potential sources of added value allows the investigator to make informed decisions concerning the costs and benefits of a hedging policy