Description Question 3 (5 Marks)

Your third client works for a large Queensland manufacturing company that is concerned about rises in electricity prices. They would like to lock in the price for the next 6 months to fulfill current orders with an estimated requirement of 150,000 megawatt hours at $35 per megawatt hour (ie. a $5,250,000 commitment). The contract will be established today (19^th February 2021) and should be in place until at least September 19^th, 2021. Assume that the storage costs for electricity are equal to the convenience yield (u=y)

Step 1 Choose an appropriate futures contract.

From the snapshot of QLD Energy futures prices as of February 19^th provided, determine which contract should be chosen stating the day of expiry for the contract. Calculate the theoretical value for the contract. Discuss any differences between the theoretical value you have calculated and the listed value.

Step 2 Determine the number of futures contracts required.

Determine the initial value of the futures contract and the number of contracts that should be purchased to hedge this position and whether they should be buy or sell positions.

Step 3 Provide the ending balances for two (2) potential future scenarios.

Determine the financial outcome for your client assuming two different potential future outcomes: 1) an ending BQ price of $40 and 2) an ending BQ price of $30. Include the cost of the hedge.

Base Load Quarter Futures New South Wales Victoria Queensland South Australia New South Wales Victoria Queensland South Australia CODE / CONTRACT BID ($) / OFFER ($) LAST/ TRADE ($) NET CHG (%) SETTLE ($) 0 CODE / CONTRACT BID ($) / OFFER ($) LAST / TRADE ($) NET CHG (%) SETTLE ($) 0 VOLUME VOLUME Base quarter Base quarter 41.000 0.00 0 41.000 40.000 0.49 8 40.200 BQH2021 Q1 21 40.400 42.000 BNH2021 Q1 21 39.000 40.500 34.000 0.00 0 33.500 42.250 43.000 1.71 10 43.750 BQM2021 Q2 21 32.500 33.500 BNM2021 Q2 21 43.400 34.250 0.00 0 34.250 45.000 1.31 27 45.600 BQU2021 Q3 21 33.250 34.760 BNU2021 Q3 21 44.600 45.150 38.600 0.00 0 38.600 45.500 1.62 1 46.250 BOZ2021 Q4 21 36.000 39.000 BNZ2021 Q4 21 45.500 45.750 48.750 2.18 2 49.840 54.050 54.000 2.05 1 55.130 BQH2022 Q1 22 48.500 49.500 BNH2022 Q1 22 54.700 32.000 1 32.810 42.600 0.95 1 43.010 BQM2022 Q2 22 31.750 32.500 2.46 V BNM2022 Q2 22 42.500 43.000 QUEENSLAND YEARLY STRIP ALL YEARS 6 EXERCISE PRICES HQM2022 | May 2021 Calls Puts SETTLE BID ($) OFFER ($) OPEN INTEREST STRIKE ($) BID ($) OFFER ($) OPEN INTEREST SETTLE PRICE ($) 0 CODE VOLUME PRICE ($) CODE VOLUME HQM20003300C 0.00 0.00 0 0 6.20 33.00 HQM20003300P 0.00 0.00 0 0 0.37 HQM20003400C 0.00 0.00 0 0 5.38 34.00 HQM20003400P 0.00 0.00 50 0 0.06 HQM20003500C 0.00 0.00 0 0 4.62 35.00 HQM20003500P 0.00 0.00 50 0 0.12 HQM20003600C 0.00 0.00 o 0 3.91 36.00 HQM20003600P 0.00 0.00 75 0 0.36 HQM20003700C 0.00 0.00 0 0 3.28 37.00 HQM20003700P 0.00 0.00 100 0 0.28 HQM20003800C 0.00 0.00 0 0 2.72 38.00 HQM20003800P 0.00 0.00 O 0 1.89 LAST: 38.25 o Latest QLD Energy Price (S.)