Capital Expenditures, Financial Constraints, and the Use of Options



This paper analyzes the use of options to hedge gold price risk in the North American gold mining industry. I find that firms with large investment programs and firms that focus on gold mining activities only are more likely and more extensive users of options. Among these firms the largest and least financially constrained firms tend to buy put options (insurance strategies), while more financially constrained firms use collar strategies or sell call options. Firms’ hedging instrument choices are also correlated with current market conditions. When gold prices decline, firms shift away from hedging with forwards and buy put options instead. When gold prices increase, firms sell more calls.
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Ingolf Dittmann