Quick Study... A costless "live-in" ratio collar
Low Prices Encourage Enhanced Hedging Products
The price of gold has Fallen some $100 (26%) over the last 2 years. With the substantial risk of sustained Central Bank sales overhanging the market, producers have continued to search for more structured hedging products that enhancing their effective Forward sale prices.
The market has seen a whole range of products offered within
this low price environment and the study below outlines a popular alternative hedging structure.
Costless ''Live-In" Ratio Collar
This trade is essentially a traditional Ratio Collar, but with the added feature that the call options will only appear if the spot price trades at or above a pre-determined trigger level which is set above the call strike.
a) The producer buys a put option with a strike above the prevailing market forward.
b) The producer sells multiple call options (2:1 is a favoured
ratio but any multiple can be structured) struck at a higher price
than the put. These calls, however, will only become "live" if the spot price trades at a pre-determined trigger level at any time during the life of the trade. This trigger level is generally set well above the call strike level.
a) Obtains downside price protection at a level above the prevailing market forward for zero premium.
b) As gold price s move higher the producer participates up through the call strike, up to the higher level.
Pay Off Diagrams:
Trigger Level Not Reached
If the trigger level is never reached through the life of the structure, the producer is left with a put option on 50,000 ozs at $315 purchased for zero upfront premium.
Trigger Level Reached
If the trigger level is reached, the producer is left with a call option on 100,000 ozs at $332 and a put option on 50,000 ozs at $315.