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Consumer Energy Cop, is an electric utility that uses natural gas to produce electricity. If the firm does not hedge its exposure to natural gas
Consumer Energy Cop, is an electric utility that uses natural gas to produce electricity. If the firm does not hedge its exposure to natural gas prices, it will have taxable income in the coming year of $80 million if the market of natural gas is " low" and -$20 million if the market price of natural gas is "high". The probability of each outcome is 50%. The firm has corporate tax rate of 40% and cannot carry its losses forward. a. What is the firm's expected net (after - tax) income for the coming year, assuming it does not hedge. b. Suppose that the firm decides to hedge a portion of its natural gas exposure by entering into futures contracts that will provide a gain $20 million if the market price of natural gas in the coming year is "high" and a loss of $20 million if the market price of natural gas i "low." The firm has to pay transaction costs of $1 million to enter into the futures contracts. What is firm's expected net (after-tax) income for the coming, year, after undertaking this hedge
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