Apollo Gold Case StudyApollo Gold Case Studyfaculty.msb.edu/bodurthj/teaching/Projects/Legget-Puente_Gold.pdf · Apollo Gold Case StudyApollo Gold Case Study Fred Leggett Madelyn

Apollo Gold Case StudyApollo Gold Case Study

Fred LeggettMadelyn Puente

14 December 2007

Business Problem• Apollo Gold (AMEX: AMT) is a gold mining

company that has entered into an agreement with

Business ProblemApollo Gold and streetTRACKS

company that has entered into an agreement with streetTRACKS Gold Trust (NYSEArca: GLD), the largest gold ETF, to supply $2,000,000 worth of gold (equivalent to 25 future contracts) for April delivery

• As of October 30, 2007, GCJ8 Futures (April 2008 s o Octobe 30, 00 , GCJ8 utu es ( p 008delivery) is $800.30 per ounce, with 100 ounces per contract

• With new mining ventures and increasingly efficient operations that are continually reducing throughput time, Apollo Gold is reaping the benefits of record , p p gGold prices.

From Apollo Gold 10-Q, 3Q 2007:

4th Quarter Forecast: With the completion of the primary crusher project in October 2007, we anticipate that improvement in ore throughput will be achieved and there will be a respective increase in metal productions. As a

$

Position Summary: -25F

• Apollo applauds its team for landing such a lucrative contract; however, it seems that the company may have acted brashly given the current market

result, we believe that in the fourth quarter 2007, the Mine should achieve its best operational results of 2007.

• Total Exposure Value: $2,000,000• Apollo Gold is short as it has already entered into the agreement with streetTRACKS• The company has an established risk loss limit: only a 5% chance of losing more than $100,000 or 5%

conditions and streetTRACKS strong, bullish views (consequently discussed).

• 5% loss probability associated with +/- 1.65 standard deviations

Market OutlookMarket Outlook• Economic environment, including lower interest rates

and a weakened US dollar, puts upward pressure on Gold prices as investors seek Gold as a safe haven

CLH8Price 87.99Call Implied Vol. 26.7530 D Hist. Vol. 26.13

• US Dollar and oil prices are key drivers of the price of Gold

• Gold is used as an inflationary hedge, and inflationary pressures continue to rise with the price of oilB th th l f th d ll d th i f il• Both the value of the dollar and the price of oil are largely political, making the commodity’s price even more volatile

• Over the past 6 months we see:

Gold has risen by 19% Oil has risen in price by 35%US $ has weakened by 8% against the Euro

Source: I-Net; CSSS; Credit Suisse Analyst Report- 30 October 2007

Market Outlook: VolatilityMarket Outlook: VolatilityGold Prices sensitive to USD/EUR Movement…

A one-cent change USD/EURexchange rate drives the gold price by US $8/oz

… As well as OilUS$ and oil volatility are becoming increasingly important drivers of gold. Gold has also di l d lit b tdisplayed seasonality between December and March. As Apollo’s contract is for April, it could be affected by seasonal trend or the decline in the seasonal

Source: I-Net; CSSS; Credit Suisse Analyst Report- 30 October 2007

trend, again affecting volatility

Market Outlook: DirectionMarket Outlook: Direction• The forecasted upward trend in Gold prices is largely driven by supply and demand• Global gold production declines as new reserves fail to replace the number of

dying minesy g• Significant inflation rates (see previous slides) accelerate this decline• Once the current deficit exceeds 500 tons there will be a significant and lasting

increase in the price of gold• An additional 6,679 tons are needed to supply the demand through 2015

Conclusion:Market forces of Supply and Demand are invariably ypushing the gold price UP

Source: GFMS: World Gold Council; Credit Suisse Standard Securities Estimates, 10-30-2007

Net Deficit

Market Outlook: Our View

• Direction: We see the price of gold i b d

Market Outlook: Our ViewMarket View Summary

going up, based on:– Supply and Demand market

forces– Rising oil prices– Gold’s role as a safe haven

against rising inflation

• Volatility: We estimate higher

Apollo Exposure versus View• After further investigation, it

seems as if Apollo’s -25F (short) Volatility: We estimate higher volatility than the market’s implied 21.85% volatility based on:– Strong correlations with

uncertainty in both oil prices

see s as po o s 5 (s o t)exposure is less than ideal given the current up/volatile market environmenty p

and the dollar exchange rate– Gold pricing seasonality at the

time of our contract– Uncertain political influences

• Given the situation, Apollo realizes it is necessary to hedge their initial exposure and effectively reverse their positionp

We estimate 25% volatilityeffectively reverse their position to long

Critical Price and Risk Premium CalculationCritical Price and Risk Premium Calculation• Today is October 30, 2007• For the Gold Contract due April 28, 2008

(GCJ8), there are 181 remaining days to maturity • Using the Market Implied Standard Deviation of

21 85% th i lik l f $623 76 t $1036 41

Market View Our ViewFutures Price 0Ft 800.3 800.3Rate 5.29% 5.29%Risk Premium 0.96% 0.96%Time 0.4959 0.4959Standard Deviation 21.85% 25.00%# f S d d D i i 1 65 1 65 21.85%, there is a likely range of $623.76 to $1036.41

• Based on market research, we predict still higher volatility of 25%, which gives us a wider likely range of $601.34 to $1075.05

• As our position is short and our view has the price of gold rising, our view does not equal a traditional short hedge that would leave us Net 2F

# of Standard Deviations 1.65 1.65Loss Limit 5% 5%Exposure? Short Short# of Contracts -25 -25

S-Market 804.03 804.03

Critical Price + 1036.40 1075.05 hedge that would leave us Net -2F. • To hedge our view, we first buy +25 contracts to

reverse the position. Based on CP- = 601.34, the loss is 24.86%.

• Next we buy an additional 5 contracts (20.11% of position) based on our 5% or $100,000 loss limitOur Net Hedge is to buy 30 contracts against our

Critical Price - 623.76 601.34

Loss @ Upper Critical Price 30% 34%Loss @ Lower Critical Price -22% -25%

Hedge Entire Position 25 25Additional Hedge to Critical Price - Limit (%) -22.67% -20.11%Additional Hedge * Outstanding +25 (Contracts) 5.7 5.0 • Our Net Hedge is to buy 30 contracts against our -

25F initial exposure.

Correlation 0.2000 Taken from Riskmetrics based on the Gold and the S&P 500*.

Additional Hedge Outstanding 25 (Contracts) 5.7 5.0

Total Contracts to Buy against original -25F 31 30

Risk Premium CalculationCo e at o 0 000 a e o s et cs based o t e Go d a d t e S& 500

Gold Standard Deviation 21.85% Taken from Riskmetrics. This is an annualized monthly volatility of 6.263%.

Market Standard Deviation 22.44% Taken from Riskmetrics. This is an annualized monthly volatility of 6.432%.

Gold Beta 0.1947

Market Premium 4.9548% S&P Average historcal return taken from Bloomberg

Gold Risk Premium Estimate 0.9649% Using the CAPM Method.

*There has been an observed declining trend in the correlation between Gold and the S&P 500. Average correlation is 0.2.

Value at Risk Initial Short Position -25FValue at Risk Initial Short Position 25FPrice Value at Risk (V@R) Underlying GC

Today 10/30/2007 Futures price 800.3 Monthly price volatility (stan. dev.) 6.26

Risk Limit 100 000 # of contract underlying 100Risk Limit 100,000 # of contract underlying 100# s.d. V@R (e.g. 1.00) 1.65 Exposure (+/-Contracts) -25Exposure (maturity) Date 4/28/2008 $ underlying -$2,000,750For risk premium-adjusted V@R Adjustment (+/-Contracts) 30 OK@ 5 Funding Rate 5.29% Monthly Estimates T>30 days= 181 Risk Premium Estimate 0.96% Riskmetrics (optional) Riskmetrics inferred (optional)

O ti t O ti tweight last 150 obs. Own estimate monthly vol*sqrt(181/30) Own estimateStandard deviations (s.d. E.g. 1% as 1.0) 6.2600 6.2600 15.3763 15.3763

Short V@R @ price*exp(+#*sd) 888.0837 888.0837 1036.2337 1036.2337$ V@R 43,892 43,892 117,967 117,967

Short upside @ price*exp(-#*sd) 722.3328 722.3328 623.8617 623.8617

Probability of doing worse than +1.65 standard deviation (or 1036.2337) is 4.95%

V@R Center and Confidence Interval

$ profit -38,984 -38,984 -88,219 -88,219

623.8617 804.0314 1036.23370%10%20%30%40%50%

0.00 200.00 400.00 600.00 800.00 1000.00 1200.00 1400.00

Value at Risk Net Position +5FValue at Risk Net Position 5FPrice Value at Risk (V@R) Underlying GC

Today 10/30/2007 Futures price 800.3 Monthly price volatility (stan. dev.) 6.26Risk Limit -100,000 # of contract underlying 100, y g# s.d. V@R (e.g. 1.00) 1.65 Exposure (+/-Contracts) 5Exposure (maturity) Date 4/28/2008 $ underlying $400,150For risk premium-adjusted V@R Adjustment (+/-Contracts) 0 OK@ 5 Funding Rate 5.29% Monthly Estimates T>30 days= 181 Risk Premium Estimate 0.96% Riskmetrics (optional) Riskmetrics inferred (optional)

i ht l t 150 b Own estimate thl l* t(181/30) Own estimateweight last 150 obs. Own estimate monthly vol*sqrt(181/30) Own estimateStandard deviations (s.d. E.g. 1% as 1.0) 6.2600 6.2600 15.3763 15.3763

Long V@R @ price*exp(-#*sd) 722.3328 722.3328 623.8617 623.8617$ V@R -38,984 -38,984 -88,219 -88,219

Long upside @ price*exp(+#*sd) 888.0837 888.0837 1036.2337 1036.2337

Probability of doing worse than -1.65 standard deviation (or 623.8617) is 4.95%

45%V@R Center and Confidence Interval

$ profit 43,892 43,892 117,967 117,967

5%10%15%20%25%30%35%40%

623.8617 804.0314 1036.23370%

0.00 200.00 400.00 600.00 800.00 1000.00 1200.00 1400.00

Initial Hedge: -25F+30FOur initial exposure is -25F

With a market down view, our loss would be (800 30 1075 05)/800 30 34 33%

Initial Hedge: 25F 30FCalculated Profit of a

Combined -25F+21F Position-25F +21F -25F+21F

740.3 1,500.0 (1,260.0) 240.0750.3 1,250.0 (1,050.0) 200.0760 3 1 000 0 (840 0) 160 0

Combined -25F+21F Position

1,000.0

1,500.0

2,000.0

(800.30 – 1075.05)/800.30 = 34.33%

To comply with our loss limit, we would hedge +21F, for a net exposure of -4F

T t L 5 00% 100% - 14.56% = 85.44%

760.3 1,000.0 (840.0) 160.0770.3 750.0 (630.0) 120.0780.3 500.0 (420.0) 80.0790.3 250.0 (210.0) 40.0

800.3 0.0 0.0 0.0810.3 (250.0) 210.0 (40.0)820.3 (500.0) 420.0 (80.0)830.3 (750.0) 630.0 (120.0) (1,500.0)

(1,000.0)

(500.0)

0.0

500.0

,000.0

C bi d 25F 30F P iti

Target Loss 5.00%= =

Actual Loss 34.33%14.56%

100% 14.56% 85.44%

85.44% X 25F = 21F

-25F + 21F= -4F

840.3 (1,000.0) 840.0 (160.0)850.3 (1,250.0) 1,050.0 (200.0)860.3 (1,500.0) 1,260.0 (240.0)

(2,000.0)

(1,500.0)

740.3 760.3 780.3 800.3 820.3 840.3 860.3

Price at Contract Maturity

Calculated Profit of a Combined -25F+30F Position

500.0

1,000.0

1,500.0

2,000.0However, our view is that Gold futures will RISE

significantly above the current futures price

Therefore, our loss would be (601.34 –800.30)/800.30 = 24.86%

T l ith t l li it ld i iti ll

Calculated Profit of aCombined -25F+30F Position

-25F +30F -25F+30F740.3 1,500.0 (1,800.0) (300.0)750.3 1,250.0 (1,500.0) (250.0)760.3 1,000.0 (1,200.0) (200.0)770.3 750.0 (900.0) (150.0)

(2,000.0)

(1,500.0)

(1,000.0)

(500.0)

0.0 To comply with out loss limit, we would initially buy +25 contracts to reverse the short position and consequently buy up to our loss limit, or +30F for a net exposure of +5F

100% 20 11% = 79 89%

780.3 500.0 (600.0) (100.0)790.3 250.0 (300.0) (50.0)

800.3 0.0 0.0 0.0810.3 (250.0) 300.0 50.0820.3 (500.0) 600.0 100.0830.3 (750.0) 900.0 150.0840.3 (1,000.0) 1,200.0 200.0

740.3 760.3 780.3 800.3 820.3 840.3 860.3

Price at Contract Maturity

Target Loss 5.00%= =

Actual Loss 24.86%20.11%

100% - 20.11% = 79.89%

79.89% X 25F = 20F

-25F + 30F= +5F

850.3 (1,250.0) 1,500.0 250.0860.3 (1,500.0) 1,800.0 300.0

Market DataMarket DataFutures Price: Maturity 04/28: $800.3

Calls PutsI t t St ik A St ik AIn-at-out of money

Strike Price

Apr Strike Price

Apr

OTM++ 870 17.7 730 12.2OTM+ 850 22 1 750 17 7OTM+ 850 22.1 750 17.7OTM 825 29.1 775 26.7ATM 800 39.4 800 39.2ITM 775 51.7 825 53.4ITM+ 750 67.3 850 71

Prices taken from Bloomberg as of 10/30/07

ITM++ 730 81.5 870 86.3

Beyond Apollo’s initial hedge, the

Hedging Alternatives: Options

company is also looking for alternative hedging opportunities through options

The adjacent table summarizes options prices at various strikes as of October 30, 2007

Hedge Summary: Map of AlternativesHedge Summary: Map of AlternativesFutures Level of ConfidencePrice View: Uncertain =Market Certain

Direction vs. Vol Up Vol Stable Vol Downmarket view (option prices cheap) (option prices fair) (option prices rich)

UP Synthetic Long Call Synthetic Short Put

(forward cheap) (suggested)

? Or Stable Long Straddle

(forward fair) Long Strangle

DOWN

(forward rich)

Bull Spread

( )

Above is a map of alternative hedging strategies centered around our market viewaround our market view

Most consistent with our view is the synthetic long call, versus other alternatives that alter various market view factors (direction/vol)

Synthetic Long Call: -25F+25C+25C-25PSynthetic Long Call: 25F 25C 25C 25PCombined -25F+25C+25C-25P Position

3,000.0

4,000.0

With a market up/volatile view, we strongly recommend the

th ti l ll

To create a synthetic long call from our initial position, using options:Synthetic Long Put + Synthetic Long Forward = Synthetic Long Call

(2,000.0)

(1,000.0)

0.0

1,000.0

2,000.0

(3,000.0)

(2,000.0)

(1,000.0)

0.0

1,000.0

2,000.0

3,000.0

4,000.0synthetic long call as a primary hedging strategy

The call option allows Apollo Gold to take advantage of an

+ =(3,000.0)

(2,000.0)

(1,000.0)

0.0

1,000.0

2,000.0

3,000.0

4,000.0

(4,000.0)

(3,000.0)

680.3 720.3 760.3 800.3 840.3 880.3 920.3Price at Contract Maturity+25C +25C-25P -25F+25C+25C-25P-25F

(4,000.0)680.3 720.3 760.3 800.3 840.3 880.3 920.3unlimited upside, while

having the flexibility of an insured downside

(4,000.0)680.3 720.3 760.3 800.3 840.3 880.3 920.3

-F+C = Synthetic Long Put +C+P = Synthetic Long Forward

-25F+25C+25C-25P-25F +25C +25C -25P Combined

680.3 3,000.0 (985.0) (985.0) (2,012.5) (982.5)700.3 2,500.0 (985.0) (985.0) (1,512.5) (982.5)720.3 2,000.0 (985.0) (985.0) (1,012.5) (982.5)

-25F+25C+25F-25F +25C +25F Combined

3,000.0 (985.0) (2,992.5) (977.5)2,500.0 (985.0) (2,492.5) (977.5)2,000.0 (985.0) (1,992.5) (977.5)

Note that the maximum cost of creating a synthetic long call position ($982.50 per oz or $98,250

t t) f ll ithi l720.3 2,000.0 (985.0) (985.0) (1,012.5) (982.5)740.3 1,500.0 (985.0) (985.0) (512.5) (982.5)760.3 1,000.0 (985.0) (985.0) (12.5) (982.5)780.3 500.0 (985.0) (985.0) 487.5 (982.5)

800.3 0.0 (977.5) (977.5) 980.0 (975.0)820.3 (500.0) (477.5) (477.5) 980.0 (475.0)840.3 (1,000.0) 22.5 22.5 980.0 25.0860.3 (1,500.0) 522.5 522.5 980.0 525.0

2,000.0 (985.0) (1,992.5) (977.5)1,500.0 (985.0) (1,492.5) (977.5)1,000.0 (985.0) (992.5) (977.5)500.0 (985.0) (492.5) (977.5)

0.0 (977.5) 7.5 (970.0)(500.0) (477.5) 507.5 (470.0)

(1,000.0) 22.5 1,007.5 30.0(1,500.0) 522.5 1,507.5 530.0

per contract) falls within our loss limit of 5% or $100,000

Ideally, by buying 25 calls and 25 forwards, we would achieve the same results with less cost ($977 50880.3 (2,000.0) 1,022.5 1,022.5 980.0 1,025.0

900.3 (2,500.0) 1,522.5 1,522.5 980.0 1,525.0920.3 (3,000.0) 2,022.5 2,022.5 980.0 2,025.0

(2,000.0) 1,022.5 2,007.5 1,030.0(2,500.0) 1,522.5 2,507.5 1,530.0(3,000.0) 2,022.5 3,007.5 2,030.0

same results with less cost ($977.50 versus $982.50)

Synthetic Short Put: -25F-25P-10P+25CSynthetic Short Put: 25F 25P 10P 25CThe synthetic short put

is an alternative hedging strategy that would be

i t if

To create a synthetic long call from our initial position, using options:Synthetic Short Call + Synthetic Texas Hedge = Synthetic Short Put

Combined Combined Position

3,000.0

4,000.0

5,000.0

appropriate if we saw a significant decrease in volatility while remaining bullish

A market up/stable view

+ =(3,000.0)

(2,000.0)

(1,000.0)

0.0

1,000.0

2,000.0

3,000.0

4,000.0

r

(2,000.0)

(1,000.0)

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

(3 000 0)

(2,000.0)

(1,000.0)

0.0

1,000.0

2,000.0

3,000.0

would allow us to trade for income by selling short puts -F-P = Synthetic Short Call -10P+25C = Synthetic Texas Hedge

(4,000.0)680.3 720.3 760.3 800.3 840.3 880.3 920.3

(3,000.0)626.3 684.3 742.3 800.3 858.3 916.3 974.3

(5,000.0)

(4,000.0)

(3,000.0)

620.3 680.3 740.3 800.3 860.3 920.3 980.3

-25P -10P +25CCombined -25F

-25F-25P-10P+25CTherefore, a -10P hedge is

more appropriate given our risk appetite

-25F -25P -10P +25C Combined620.3 4,500.0 (3,512.5) (1,405.0) (985.0) (1,402.5)650.3 3,750.0 (2,762.5) (1,105.0) (985.0) (1,102.5)680.3 3,000.0 (2,012.5) (805.0) (985.0) (802.5)

-25F -25P -25P +25C Combined620.3 4,500.0 (3,512.5) (3,512.5) (985.0) (3,510.0)650 3 3 750 0 (2 762 5) (2 762 5) (985 0) (2 760 0)

-10P versus -25P Hedge Downside at CP-

appetite

Unfortunately this also limits the income gained from the position to $394.50 as we are selling less put options

710.3 2,250.0 (1,262.5) (505.0) (985.0) (502.5)740.3 1,500.0 (512.5) (205.0) (985.0) (202.5)770.3 750.0 237.5 95.0 (985.0) 97.5800.3 0.0 980.0 392.0 (977.5) 394.5830.3 (750.0) 980.0 392.0 (227.5) 394.5860.3 (1,500.0) 980.0 392.0 522.5 394.5890.3 (2,250.0) 980.0 392.0 1,272.5 394.5

650.3 3,750.0 (2,762.5) (2,762.5) (985.0) (2,760.0)

-25F -25P -10P +25C Combined620.3 4,500.0 (3,512.5) (1,405.0) (985.0) (1,402.5)650.3 3,750.0 (2,762.5) (1,105.0) (985.0) (1,102.5)

selling less put options 920.3 (3,000.0) 980.0 392.0 2,022.5 394.5950.3 (3,750.0) 980.0 392.0 2,772.5 394.5980.3 (4,500.0) 980.0 392.0 3,522.5 394.5

Note that a -25F-25P-25P+25C hedge would position our downside far beyond our risk limits

Alternative Bull Spread: -25F+25Citm-25Pitmte at e u Sp ead 5 5C t 5 tL or S (Long/Short) S L SF, C, or P F C PForward/Strike Price 800.3 775.0 825.0Price (C or P) 0 0 (F) FV 0 00 51 70 53 40

Combined -25F+25C-25P Position4 , 0 0 0 . 0

Price (C or P), 0.0 (F) - FV 0.00 51.70 53.40Number of Contracts 25 25 25

1, 0 0 0 . 0

2 , 0 0 0 . 0

3 , 0 0 0 . 0

Calculated Profit of a

The Bull SpreadView: Limited Up, Concerns b t bi D

( 3 0 0 0 0 )

( 2 , 0 0 0 . 0 )

( 1, 0 0 0 . 0 )

0 . 0 Calculated Profit of aCombined -25F+25C-25P Position

-25F +25C -25P -25F+25C-25P680.3 3,000.0 (1,292.5) (2,282.5) (575.0)700.3 2,500.0 (1,292.5) (1,782.5) (575.0)720.3 2,000.0 (1,292.5) (1,282.5) (575.0)740.3 1,500.0 (1,292.5) (782.5) (575.0)

about a big Down

Maximum Income = $67,500

Maximum Loss = $57,500

Vs. Loss Limit = $100,000

( 4 , 0 0 0 . 0 )

( 3 , 0 0 0 . 0 )

6 8 0 . 3 7 2 0 .3 76 0 . 3 8 0 0 . 3 8 4 0 . 3 8 8 0 . 3 9 2 0 .3

-25F +25C-25P -25F+25C-25P

, ( , ) ( ) ( )760.3 1,000.0 (1,292.5) (282.5) (575.0)780.3 500.0 (1,160.0) 217.5 (442.5)

800.3 0.0 (660.0) 717.5 57.5820.3 (500.0) (160.0) 1,217.5 557.5840.3 (1,000.0) 340.0 1,335.0 675.0860.3 (1,500.0) 840.0 1,335.0 675.0

This position gives insurance on our view of volatility but it conflicts our view on direction. Additionally in the likely scenario that price increases at

880.3 (2,000.0) 1,340.0 1,335.0 675.0900.3 (2,500.0) 1,840.0 1,335.0 675.0920.3 (3,000.0) 2,340.0 1,335.0 675.0

pany rate above 800.3 will generate income for our view.

Alternative Long Straddle: -25F+25C+25CAlternative Long Straddle: 25F 25C 25CCombined -25F+25C+25C Position

3,000.0

4,000.0L or S (Long/Short) S L LF, C, or P F C CForward/Strike Price 0.0 800.0 800.0P i (C P) 0 0 (F) FV 0 00 39 40 39 40

(1,000.0)

0.0

1,000.0

2,000.0Price (C or P), 0.0 (F) - FV 0.00 39.40 39.40Number of Contracts 25 25 25

The Long Straddle

(4,000.0)

(3,000.0)

(2,000.0)

680.3 720.3 760.3 800.3 840.3 880.3 920.325F +25C

View: High Volatility, Neutral on Direction

Maximum Income = Unlimited

Maximum Loss = $195 500

Calculated Profit of aCombined -25F+25C+25C Position

-25F +25C +25C -25F+25C+25C680.3 3,000.0 (985.0) (985.0) 1,030.0700.3 2,500.0 (985.0) (985.0) 530.0

-25F +25C+25C -25F+25C+25C

Maximum Loss = $195,500

Vs. Loss Limit = $100,000

In the case of no volatility, however, and if the position stays at the money or slightly OTM or 700.3 2,500.0 (985.0) (985.0) 530.0

720.3 2,000.0 (985.0) (985.0) 30.0740.3 1,500.0 (985.0) (985.0) (470.0)760.3 1,000.0 (985.0) (985.0) (970.0)780.3 500.0 (985.0) (985.0) (1,470.0)

800.3 0.0 (977.5) (977.5) (1,955.0)820.3 (500.0) (477.5) (477.5) (1,455.0)840.3 (1,000.0) 22.5 22.5 (955.0)

position stays at the money or slightly OTM or ITM, we could nearly double or loss limit (undesirable).

Based on our certainty in volatility this should not be a concern 860.3 (1,500.0) 522.5 522.5 (455.0)

880.3 (2,000.0) 1,022.5 1,022.5 45.0900.3 (2,500.0) 1,522.5 1,522.5 545.0920.3 (3,000.0) 2,022.5 2,022.5 1,045.0

be a concern.

Alternative Long Strangle: -25F+25C+25CAlternative Long Strangle: 25F 25C 25C

The Long Strangle Combined -25F+25C+25C PositionL or S (Long/Short) S L L

View: Volatility in either direction; less certain than the Long Straddle.

Maximum Income = Unlimited

Maximum Loss = $110,250 1,000.02,000.03,000.04,000.05,000.0

Calculated Profit of aCombined -25F+25C+25C Position

25F +25C +25C 25F+25C+25C

F, C, or P F C CForward/Strike Price 800.3 775.0 870.0Price (C or P), 0.0 (F) - FV 0.00 51.70 17.70Number of Contracts 25 25 25

Vs. Loss Limit= $100,000

This is a better option than the Straddle based on our view of volatility but closer to our loss limit. Furthermore we can adjust our in- (4,000.0)

(3,000.0)(2,000.0)(1,000.0)

0.0,000.0-25F +25C +25C -25F+25C+25C

620.3 4,500.0 (1,292.5) (442.5) 2,765.0650.3 3,750.0 (1,292.5) (442.5) 2,015.0680.3 3,000.0 (1,292.5) (442.5) 1,265.0710.3 2,250.0 (1,292.5) (442.5) 515.0740.3 1,500.0 (1,292.5) (442.5) (235.0)770.3 750.0 (1,292.5) (442.5) (985.0)

800 3 0 0 (660 0) (442 5) (1 102 5)Furthermore we can adjust our inthe-moneyness of the options to meet our loss limit. As the call increases more OTM, we are safer within our loss limit.

The contained risk of stability and

(5,000.0)620.3 680.3 740.3 800.3 860.3 920.3 980.3

Price at Contract Maturity-25F +25C+25C -25F+25C+25C

800.3 0.0 (660.0) (442.5) (1,102.5)830.3 (750.0) 90.0 (442.5) (1,102.5)860.3 (1,500.0) 840.0 (442.5) (1,102.5)890.3 (2,250.0) 1,590.0 65.0 (595.0)920.3 (3,000.0) 2,340.0 815.0 155.0950.3 (3,750.0) 3,090.0 1,565.0 905.0980.3 (4,500.0) 3,840.0 2,315.0 1,655.0

The contained risk of stability and its associated loss is outweighed by the possibility of great gains with average to above-average volatility.

RecommendationRecommendation• Consistent with our market view of Up/Volatile, we recommend Apollo Gold choose

the S nthetic Long Callthe Synthetic Long Call

Position Name Maximum Gain Maximum Loss Loss AllowanceSynthetic Long Call Unlimited $98,250 $100,000Long Straddle Unlimited $195,000 $100,000Long Strangle Unlimited $110,250 $100,000Bull spread $67,500 $57,500 $100,000Synthetic Short Put $39,450 large downside $100,000

• In analyzing the above five positions, the Long Call gives the appropriate combination of upside (unlimited) versus downside (within our loss limit)

• The Long Strangles and Straddles also have this unlimited upside but are outside our• The Long Strangles and Straddles also have this unlimited upside but are outside our loss limit range

• Bull Spreads, while well within our loss limit range, limit our upside for a position on an underlying that is very likely to increase