Case 1 Hong Kong Motor Bus Company Hong Kong Motor Bus Company (HMB) is your client and operates most bus routes in Hong Kong. With the war in Ukraine, the oil price has been very volatile and appears to have a upward trend recently. HMB has come to you for advice in risk management. First of all, HMB buys oil in operation. They are considering whether or not to hedge their oil price risk. You explained to them what the advantages of hedging are and also explained reasons not to hedge. MC Question 1 (5 points) Which of the following is a reason that HMB wants to hedge risk? A) Monitoring costs B) Bankruptcy costs C) Transaction costs on oil derivatives D) Costs in hiring experts to monitor the positions MC Question 2 (5 points) HMB has an inherent (1) They could hedge his position by (2) (1) (2) A) Short position in the oil price. Short a collar on oil. B) Long position in the oil price. Long a collar on oil. C) Short position in the oil price. Short a call on oil. D) Long position in the oil price. Long a call on oil. Short Question 1 (8 points) HMB has scheduled to buy oil exactly 1 year from now (1 March). HMB is considering a strategy that would limit the maximum price they pay for oil (strategy 1). The exercise price in strategy 1 is US$105 per barrel. (a) What is the unhedged cashflow per barrel? Draw the payoff diagram. (4 points) (b) What is the hedged cashflow per barrel? Draw the payoff diagram. (4 points) HMB found that strategy 1 appears to be costly and would like to pay a lower cost for the insurance strategy. MC Question 3 (5 points) Which of the following strategy can be a hedge and is less costly than the original strategy 1? A) Short Collar with strike prices US$100 and US$105 per barrel B) Short Forward C) Long put with strike price of US$105 per barrel D) Long call with strike price of US$100 per barrel