Cheap gold, the foundation of the strategy, was available only because central banks were happy to lend it out at 1-2 per cent. Either the miner or the bullion bank had to take the risk that gold interest rates would rise over the life of the contract. The transactions were not necessarily perfect matches. That kind of deal was fairly straightforward. The snag was that if the gold price rose, as it did this autumn, the calls moved into the money for the holder, while the puts moved out of the money, leaving the miners with a liability.
Most miners treat the mark to market value as an irrelevancy.
But in some cases the banks that sold the miners their contracts have the right to demand cash deposits if the contract value goes negative. For example, some companies sold perhaps twice as many calls as puts, which reduced the upfront cost but increased the risks of the portfolio moving rapidly into negative territory if the gold price rose. In many exotics the terms change depending on triggers, so that the miner's precise liability cannot be calculated in advance, although it can be capped. Anyone selling a call loses money if the bullion price rises. But with escalating ounce calls, the further the price moves against the seller, the greater his exposure to it.