Petrochemical Parfum (PP) is concerned about a possible increase in the price of heavy fuel oil, which is one of its major inputs. If PP could use either options or futures contracts to protect itself against a rise in the price of crude oil, compute the payoffs in each case if the oil price were $60, $70, or $80 a barrel. Assume the current price of oil is $60 per barrel, the futures price is $70, and the option exercise price is $70. Oil Price per Barrel $ $ $ 60 70 80 Futures-Hedged Expense Options-Hedged Expense

Petrochemical Parfum (PP) is concerned about a possible increase in the price of heavy fuel oil, which is one of its major inputs. If PP could use either options or futures contracts to protect itself against a rise in the price of crude oil, compute the payoffs in each case if the oil price were $60, $70, or $80 a barrel. Assume the current price of oil is $60 per barrel, the futures price is $70, and the option exercise price is $70. Oil Price per Barrel $ $ $ 60 70 80 Futures-Hedged Expense Options-Hedged Expense

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 1P

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Suppose you are concerned about your ﬁrm’s jet fuel exposure. Further, your analysis suggests the best futures contract to hedge jet fuel is unleaded gasoline. The fuel volatility (standard deviation of changes in' your ﬁrm’s entire jet fuel exposure) is $17,347,281, and the unleaded gasoline futures contract volatility (standard deviation of price changes in one unleaded gasoline futures contract) is $14,490. Suppose the correlation coefﬁcient between fuel volatility and unleaded gasoline futures contract volatility is 0.71. Calculate the minimum variance hedge ratio. Defend whether this’ is a perfect hedge.
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Shell corporation is concerned about the rising price of oil. The market iscurrently at $25 per barrel. Shell is afraid of the market price rising above $30 perbarrel. What type of option should shell purchased? What happen if the price ofthe of the oil per barrel rises above $30 dollars? What happen if the price of theoil per barrel is below $30 dollars in the future.
Suppose a oil producer wants to hedge against possible price fluctuations in the market. For example, in November, he decides to enter into a short-sell position in a 2 (two) futures contracts in order to limit his exposure to a possible decline in the cash price prior to the time when he will sell his oil in the cash market. Assume that the spot price of oil is $30 and the futures price for a March futures contract is $45. What is the basis? Выберите один ответ: a. 30 b. 7.5 c. 25 d. 15 e. 45
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