American Barrick Case Assignment

Reported by:
Madison Cavanagh-Mailloux
Ting Nie
Kecheng Chen
Nicholas Murry
Daniil Proskura

6. What is a spot deferred contract? Is it an option? A forward

contract? Why has ABX chosen to rely on spot deferred contracts
relative to other gold derivatives?
A spot deferred contract is a special type of forward contract in in
which the seller can choose to roll the contract over to a new forward
contract on the delivery date, with final delivery being required

between 5 and 10 years after the initiation of the contract. Although

the seller must ultimately deliver the quantity of gold called for in the
forward contract, the specific delivery date is not decided in advance.
Viewed from American Barricks perspective, the benefit of entering
into an SDC versus a forward contract is that if the spot gold price is
rising, American Barrick can sell the gold in the spot market and take
the advantage of the high spot price. Then they can roll the contract
forward to the next period and deliver the gold when the price goes
down. Thus, American Barrick will never have to deliver gold at a price
that is below the spot price, at least for the 10-year duration of the
SDC. Furthermore, the SDC takes away the risk of American Barrick
having to deliver gold that is doesnt have.
American Barrick has moved almost exclusively to SDCs. We have
already discussed the advantage of SDCs over standard futures
contracts. They are also superior to a hedging strategy that employs
options (for example, holding long a put and short a call) since the
short call in such a collar limits upside potential.