Question 1The CEO of Sons of Midas (company) should be concerned about volatility given the inconsistent movement of gold prices and currency fluctuations associated with United States dollars (USD) versus to Australian dollars (AUD). This can lead to unexpected results for the company's profits and losses. Without an effective hedging strategy, the company is exposed to gold price volatility and currency fluctuations between USD and AUD. As production costs incurred in AUD are expected to be constant at a volume of 50,000 troy ounces. However, since the company's revenues are generated in USD, this exposes the company to negative profitability if the AUD appreciates against the dollar. Furthermore, the decrease in gold prices also affects the company's revenue and profit margin. The company can protect itself by entering into forward or futures contracts with its customers to minimize the impact of volatility on fluctuations associated with the exchange rate and gold prices. The following factors make it necessary to reduce volatility: • There is a direct correlation between the depreciation of the AUD against the USD and gold prices: when gold prices fall, the AUD depreciates against the USD. As global gold sales fell by 12% and are expected to decline significantly in 2014. This creates uncertainty and puts pressure on gold prices. • The company operates in USD; any possible weakening of the dollar will put pressure on the company's profits. However, the company is naturally hedged where the movement of gold prices offsets the risks associated with exchange rate fluctuations for USD clients. A weakening of the USD is likely to result in a rise in the price of gold, given the inverse correlation between USD exchange rate fluctuations… halfway through the paper… if the price of gold rises and goes against market expectations. From a conservative point of view, the purchased put option, straddle and strangle are the best options despite the higher premium as they produce gains when gold prices fall and limit losses or in some cases even provide a gain when gold prices rise. Overall Conclusion: It is highly recommended that the company incorporate the use of options into its hedging strategy, as the gold commodity market is increasingly volatile and the use of forward and futures contracts alone exposes the company to losses if forwards and futures move against market expectations. Options, despite their complexity, when used and monitored effectively can minimize downside exposure in forward and futures contracts with losses limited to the option premium if the hedging strategy goes against market expectations.