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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: regli who wrote (43874)1/5/2006 6:21:21 PM
From: Casaubon  Read Replies (1) of 116555
 
ABX is selling gold out of the ground at a set price agreed upon by both parties. They sell above cost and turn a profit, regardless of POG fluctuations. Their revenue stream is therefore more predictable. If the POG were to drop below the hedge price they make even more than otherwise expected. If POG rises above the hedge price, they make only the agreed upon profit. In other words, they do not lose money; they do however lose potential profit. It is the same as buying a stock and selling calls against your position. You cap your profitability, but reduce your risk. Using such a strategy, you will make the most money when your stock gets called everytime. This is analagous to POG rising above the hedge price.
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