a. Suppose that the companys monthly crude oil output is expected to remain constant in 2018. If you decide to lock in the 2018 prices using WTI futures, can you tell the average price (per barrel) that the company will receive for its 2018 output? Please explain. Note: Assume away marking to market flows, time value of money, and transportation/storage costs.

b. Would your answer in part a change if, instead of being based in North Dakota and producing Bakken crude, the company were located in West Texas where the CME contracts underlying asset (WTI crude) is produced? Explain.

c. Identify 1 major pro and 1 major con of using WTI futures to hedge the firms exposure.

d. If the company were to use a customized 1-year swap priced at $50.375 per barrel, with monthly deliveries for each of the 12 months in 2018, would that be a good deal for your company? Please explain.

Question 4(7.5 points) Suppose that we are in October 2017. You work for the risk management department of a crude oil extraction company located in North Dakota's Bakken (a major U.S. shale oil field). In the past year, spot Bakken oil has generally sold at a discount of about $5 to the spot West Texas Intermediate (WTI) light sweet crude oil benchmark. You have been tasked with hedging the first 6 months of the company's 2018 oil output. Suppose that the term structure of WTI crude oil futures prices looks as follows (prices that you can lock in on 12-7-2017): Month Last Change Prior Settle Open High Low Volume Jan-18 56.62 0.66 55.96 56 56.66 55.82 156,276 Feb-18 56.69 0.66 56.03 56.09 56.73 55.88 80,218 Mar-18 56.7 0.65 56.05 56.11 56.74 55.93 38,835 Apr-18 56.71 0.64 56.07 56.16 56.74 55.96 15,916 May-18 56.65 0.64 56.01 56.14 56.67 55.92 13,765 Jun-18 56.49 0.63 55.86 55.96 56.51 55.77 22,618 Jul-18 56.27 0.61 55.66 55.81 56.29 55.62 5,186 Aug-18 56.03 0.61 55.42 55.52 56.04 55.36 4,655 Sep-18 55.77 0.6 55.17 55.31 55.78 55.11 3,712 Oct-18 55.51 0.59 54.92 55.01 55.51 54.94 725 Nov-18 55.25 0.57 54.68 54.77 55.25 54.65 4,333 Dec-18 55.01 0.56 54.45 54.5 55.05 54.37 15,932 Jan-19 54.2 1,668 CAREFUL: The January 2018 contract requires delivery starting on the 3rd business day before the 25th of December 2017. More generally, the WTI futures contract for month t settles about 10 calendar days before the end of month 1-1. Question 4(7.5 points) Suppose that we are in October 2017. You work for the risk management department of a crude oil extraction company located in North Dakota's Bakken (a major U.S. shale oil field). In the past year, spot Bakken oil has generally sold at a discount of about $5 to the spot West Texas Intermediate (WTI) light sweet crude oil benchmark. You have been tasked with hedging the first 6 months of the company's 2018 oil output. Suppose that the term structure of WTI crude oil futures prices looks as follows (prices that you can lock in on 12-7-2017): Month Last Change Prior Settle Open High Low Volume Jan-18 56.62 0.66 55.96 56 56.66 55.82 156,276 Feb-18 56.69 0.66 56.03 56.09 56.73 55.88 80,218 Mar-18 56.7 0.65 56.05 56.11 56.74 55.93 38,835 Apr-18 56.71 0.64 56.07 56.16 56.74 55.96 15,916 May-18 56.65 0.64 56.01 56.14 56.67 55.92 13,765 Jun-18 56.49 0.63 55.86 55.96 56.51 55.77 22,618 Jul-18 56.27 0.61 55.66 55.81 56.29 55.62 5,186 Aug-18 56.03 0.61 55.42 55.52 56.04 55.36 4,655 Sep-18 55.77 0.6 55.17 55.31 55.78 55.11 3,712 Oct-18 55.51 0.59 54.92 55.01 55.51 54.94 725 Nov-18 55.25 0.57 54.68 54.77 55.25 54.65 4,333 Dec-18 55.01 0.56 54.45 54.5 55.05 54.37 15,932 Jan-19 54.2 1,668 CAREFUL: The January 2018 contract requires delivery starting on the 3rd business day before the 25th of December 2017. More generally, the WTI futures contract for month t settles about 10 calendar days before the end of month 1-1