Case Study: American Barrick

Q2.What is the stated objective of the hedging program, and what should be the objective according to you?

For the American Barrick Resources Corporation, the hedging program was of utmost importance to them. When the world economy was in the stage of recession and the market witnessed falling prices of gold, selling gold above the market was proving to be profitable to the sellers. This all happened due to the company’s hedging strategy. It was a unique characteristic and feature of the organization. Discovery of new gold mines brought down the stress that the new issues were piling on the company.
The company carried out a variety of ways to have a control over their gold price. They first did gold financing to where they jumped into forwards

While they would lose out on high gains from gold price peaks, they felt that they were in a better position by gaining profits even in periods of gold price dips. Hence, they were able to make steady profits despite dealing a price volatile commodity.

Performance of American Barrick
America Barrick, despite fluctuations in gold prices, performed very well as compared to its peers. Many investors were willing to invest in American Barrick due to its steady and well and performing shares which were primarily contributed to by good gold price risk management.
Looking below at exhibit 4 from the case, we can see how the investors benefitted from the steady share price gain of American Barrick’s shares over the years.

Risk Management & Shareholder Value
In today’s world, companies can be made or ruined by the risk management programs implemented by the organization. The major way for the shareholders to benefit through a company is for the company to produce maximum profit possible from its assets. However, with risks involved with every business today, maximum profit does not lead to maximum shareholder gain unless the company implements a program which will enable it to keep its profit from being exposed to market

The company can sell the futures contract on such a way that small and large investor can take position by investing in fraction of the contract.
In forwards contracts of Barrick, like any other forward contract it is not exchange traded, the company can set the terms and condition, to deliver gold at a specific date to the price which is set in the contract. Since these over the counter contracts are tailored for the needs of the company and are usually for a size of more than 10,000 ounces, parties involved with the contract close it by negotiation settlement. Since these contracts had multiple sides, Barrick and other companies stopped issuing forward for sometime after 1992. In 1992, Barrick issued forward sales for 289,273 ounces at $415, which accounted for 25 percent of the total hedging for that year based on Exhibit 8 of the case study. Even companies like Amax Gold, Echo bay had completely discontinued forward sales after 1992 for a