A natural gas producer wants to hedge the selling price for its natural gas. Prices for natural gas are quoted in USD per mmBTU (million British Thermal Units). On September 17, the company buys a 7.00 January natural gas put for 0.48. Expected basis for January is -0.30 and commission is 0.025 (exchange plus broker commission). This sets a price floor of 7.00 0.48 - 0.025 + (-0.30) = 6.195/mmBTU.

By selling a 7.50 January call for 0.20 plus 0.025 commission, the producer could raise the floor to but sets a ceiling at ...

For the following two scenarios, set up the hedge using both put and call options in each scenario and calculate the net price that the producer receives for its natural gas. Assume basis remains unchanged and that the option that is out of the money simply expires worthless. Also note that commission is 0.025 per option and is charged only once (0.025 is round trip, i.e., it gets the producer in and out of the market).

Natural gas price decrease
Date	Cash market	Options market	Basis
September 17	Minimum selling price USD Maximum selling price USD		expected January -0.30
January 2	sell at 5.30	7.00 January put at 1.40	-0.30
	Natural gas net price =	result =

Natural gas price increase
Date	Cash market	Options market	Basis
September 17	Minimum selling price USD Maximum selling price USD		expected January -0.30
January 2	sell at 7.80	7.50 January call at 0.60	-0.30
	Natural gas net price =	result =

Were the floor and ceiling effective?