From yesterdays The Australian Margin Call column.
You know Sons of Gwalia looks suspiciously cheap. When bullion was rocketing last week Sons was slipping.
Everyone knows it's wickedly hedged but could it be that Sons has a “knock-out'' option in its hedge book? That's an option which knocks out an option.
So, for example, Sons has forward-sold a lot of its gold and might have bought a call option to protect its position in the case of a big gold rally. But it might have written a “knockout'' clause over that, perhaps to get the call option on the cheap. So, in the event of a run in the price of gold, it might suddenly have to cover.
You wouldn't want to have to cover at $660 an ounce, or something like that.
The rumour is that SGW will go under because of their hedging.
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