A firm that sells oil worries that if oil price is too low, they will suffer a loss and lead to bankruptcy. They will be making a delivery at the end of the year, and they will receive the spot price at that time. Their cost of extracting oil was $120 per barrel. The firm will bankrupt if they lose more than $30 per barrel. The one year risk-free interest rate is 2% p.a..

Which of the following would be the best hedging strategy that would guarantee the firm avoid bankruptcy?

A firm that sells oil worries that if oil price is too low, they will suffer a loss and lead to bankruptcy. They will be making a delivery at the end of the year, and they will receive the spot price at that time. Their cost of extracting oil was $120 per barrel. The firm will bankrupt if they lose more than $30 per barrel. The one year risk-free interest rate is 2% p.a.. Which of the following would be the best hedging strategy that would guarantee the firm avoid bankruptcy? *In the risk management chapter, there is no need to compound operational costs, i.e. there is no need to compound $120. a. Short forward with an exercise price of 91.8 O b. Long forward with an exercise price of 91.8 O c. Long Put with a strike price of 120 and a premium of $30.75. O d. Short Call with a strike price of 120 and a premium of 3.12