DERIVATIVE CASES

CASE STUDY II

AMERICAN BARRICK RESOURCES CORPORATION:
MANAGING GOLD PRICE RISK

Group II - Cohort 5

American Barrick is the largest gold producer in North America. The implementation of the gold-hedging program differentiated the firm from other major gold rivals and improved its reserve and financial strength. In 1995, American Barrick ’s latest gold find necessitated the company to determine a new hedge strategy for its gold production.

I. Motivation
From the Exhibit 3, we find that few gold producers hedge their productions. Except the American Barrick, who hedged 94% of …show more content…
WACC can be calculated for American Barrick in this case based on several assumptions. First, cost of debt is assumed to be 4%. Second, risk-free rate is estimated according to 5-year Treasuries which is equal to 5.83%. Third, market risk premium, which is determined for the economy as a whole, is calculated as arithmetic mean equal to 7.9%.

|Table 2: WACC CALCULATION |
| | |Calculation |Result |
|1 |Cost of debt | | |
| |Kd |4% |4% |
| |t = 20% | | |
| |Kd * (1-t) |4% * (1-20%) |3.20% |
|2 |Cost of Equity | | |
| |Ke = Rf + beta* (MRP) |5.83% + 0.61* 7.9%