Alliant (a utility company that purchases natural gas) is wanting to hedge its exposure to fluctuations in
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Question:
- Alliant (a utility company that purchases natural gas) is wanting to hedge its exposure to fluctuations in the price of Natural gas between now and March 2023. Natural gas is sold in units called mmBtu.
- Is Alliant worried about the price of natural gas increasing or decreasing over this time period? Explain.
- One futures contract is for 10,000 mmBtu. Suppose Alliant plans on needing 5,000,000 mmBtu in March. How many contracts does that represent? Would you suggest Alliant buy or sell such contracts to hedge their risk?
- If such a contract has a futures price of $3.15 per mmBtu, what is the price of one contract?
- What is the total cost for Alliant in this scenario?
- Calculate the TOTAL (not per unit) opportunity profit (loss) for Alliant from the hedging if the spot price in March is:
- Graph the opportunity profit (loss) for Alliant.
- Suppose you look and see that Alliant could have also hedged their risks using either a call option or a put option with a $3.15 strike price. The March put option price is $0.08. The March call option price is $0.14. Which would they buy if they wanted to hedge their risk? Explain.
Related Book For
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon
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