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Gold/Mining/Energy : Silver prices

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To: Archie Meeties who wrote (2341)	11/26/1999 6:33:00 AM
From: Jaakko	Read Replies (2) of 8010

On TVX hedging strategy: Message 11880016 By writing (selling) a call option at $5.99, TVX essentially gives the call-buyer a right (but not an obligation) to buy silver from TVX at $5.99 an ounce btw Dec. 1999 and Dec. 2003. If POS never reaches that price during this period TVX gets to keep the proceeds from the sale (writing) of the call option. This is current cash flow to TVX. The risk for TVX for having written this call option is two-fold: 1) If mine development is delayed and/or production is not materialized for the quantities specified during this time period, TVX basically has to go to the spot market to buy the equivalent quantities of silver for delivery when the call-holder exercises the call option. This requires extra cash and may result in a net loss to TVX if the difference btw the spot price and $5.99/oz. is greater than the proceeds received by TVX from writing the call option. 2) If production comes on stream O.K. and TVX delivers the quantities of silver called for when the call-holder exercises the call option, there is no cash loss but TVX have forgone all the gain above $5.99/oz if the spot price is higher than $5.99 (if it is lower the call-holder would be stupid to exercise the call option). This strategy kind of puts a ceiling on the potential gain for TVX for the quantities of silver involved and reduces the upside leverage of the share price to the investor. In all fairness, TVX seems to use a combination of buying of put options and writing of call options. Cash-flow-wise the proceeds of call writing may (partially/totally/more than) offset the cost of buying the put options. The risk/reward ratio of the total TVX hedging strategy (which seems to be 2:1 of writing calls vs. buying puts) seems to anticipate a POS below $5.99. This may or may not be attractive to TVX depending on the outlook on POS and anticipated company development issues. The put options I have explained in the following response: Message 12039802

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