1. Devon Energy, a gas processing company, expects to pay for 400,000 mmBtu of natural gas at a close of day on Friday, September 11th. They want to hedge their position with Henry Hub natural gas futures. Assume that they enter into the position at close of day on Tuesday, September 8th. The size of one natural gas futures is 10,000 mmBtu. Futures and spot data are provided in the file HW1_data.doc.

1. Describe the position they should enter (long or short, contract month).

2. Compute the hedge ratio using data from Data_hw1.xls file.

3. How many contracts do they need to buy or sell?

4. Document the price gain or loss every day that their position is open.

5. What is the total cost after they have closed out their futures position, and made their payment?

6. What is the effective cost per mmBtu?

1. Devon Energy, a gas processing company, expects to pay for 400,000 mmBtu of natural gas at a close of day on Friday, September 11th. They want to hedge their position with Henry Hub natural gas futures. Assume that they enter into the position at close of day on Tuesday, September 8th. The size of one natural gas futures is 10,000 mmBtu. Futures and spot data are provided in the file HW1_data.doc.

1. Describe the position they should enter (long or short, contract month).

2. Compute the hedge ratio using data from Data_hw1.xls file.

3. How many contracts do they need to buy or sell?

4. Document the price gain or loss every day that their position is open.

5. What is the total cost after they have closed out their futures position, and made their payment?

6. What is the effective cost per mmBtu?

1. Devon Energy, a gas processing company, expects to pay for 400,000 mmBtu of natural gas at a close of day on Friday, September 11th. They want to hedge their position with Henry Hub natural gas futures. Assume that they enter into the position at close of day on Tuesday, September 8th. The size of one natural gas futures is 10,000 mmBtu. Futures and spot data are provided in the file HW1_data.doc.

1. Describe the position they should enter (long or short, contract month).

2. Compute the hedge ratio using data from Data_hw1.xls file.

3. How many contracts do they need to buy or sell?

4. Document the price gain or loss every day that their position is open.

5. What is the total cost after they have closed out their futures position, and made their payment?

6. What is the effective cost per mmBtu?

1. Devon Energy, a gas processing company, expects to pay for 400,000 mmBtu of natural gas at a close of day on Friday, September 11th. They want to hedge their position with Henry Hub natural gas futures. Assume that they enter into the position at close of day on Tuesday, September 8th. The size of one natural gas futures is 10,000 mmBtu. Futures and spot data are provided in the file HW1_data.doc.

1. Describe the position they should enter (long or short, contract month).

2. Compute the hedge ratio using data from Data_hw1.xls file.

3. How many contracts do they need to buy or sell?

4. Document the price gain or loss every day that their position is open.

5. What is the total cost after they have closed out their futures position, and made their payment?

6. What is the effective cost per mmBtu?

1. Devon Energy, a gas processing company, expects to pay for 400,000 mmBtu of natural gas at a close of day on Friday, September 11th. They want to hedge their position with Henry Hub natural gas futures. Assume that they enter into the position at close of day on Tuesday, September 8th. The size of one natural gas futures is 10,000 mmBtu. Futures and spot data are provided in the file HW1_data.doc.

1. Describe the position they should enter (long or short, contract month).

2. Compute the hedge ratio using data from Data_hw1.xls file.

3. How many contracts do they need to buy or sell?

4. Document the price gain or loss every day that their position is open.

5. What is the total cost after they have closed out their futures position, and made their payment?

6. What is the effective cost per mmBtu?

1. Devon Energy, a gas processing company, expects to pay for 400,000 mmBtu of natural gas at a close of day on Friday, September 11th. They want to hedge their position with Henry Hub natural gas futures. Assume that they enter into the position at close of day on Tuesday, September 8th. The size of one natural gas futures is 10,000 mmBtu. Futures and spot data are provided in the file HW1_data.doc.

1. Describe the position they should enter (long or short, contract month).

2. Compute the hedge ratio using data from Data_hw1.xls file.

3. How many contracts do they need to buy or sell?

4. Document the price gain or loss every day that their position is open.

5. What is the total cost after they have closed out their futures position, and made their payment?

6. What is the effective cost per mmBtu?

1. Devon Energy, a gas processing company, expects to pay for 400,000 mmBtu of natural gas at a close of day on Friday, September 11th. They want to hedge their position with Henry Hub natural gas futures. Assume that they enter into the position at close of day on Tuesday, September 8th. The size of one natural gas futures is 10,000 mmBtu. Futures and spot data are provided in the file HW1_data.doc.

1. Describe the position they should enter (long or short, contract month).

2. Compute the hedge ratio using data from Data_hw1.xls file.

3. How many contracts do they need to buy or sell?

4. Document the price gain or loss every day that their position is open.

5. What is the total cost after they have closed out their futures position, and made their payment?

6. What is the effective cost per mmBtu?

1. Devon Energy, a gas processing company, expects to pay for 400,000 mmBtu of natural gas at a close of day on Friday, September 11th. They want to hedge their position with Henry Hub natural gas futures. Assume that they enter into the position at close of day on Tuesday, September 8th. The size of one natural gas futures is 10,000 mmBtu. Futures and spot data are provided in the file HW1_data.doc.

1. Describe the position they should enter (long or short, contract month).

2. Compute the hedge ratio using data from Data_hw1.xls file.

3. How many contracts do they need to buy or sell?

4. Document the price gain or loss every day that their position is open.

5. What is the total cost after they have closed out their futures position, and made their payment?

6. What is the effective cost per mmBtu?

1. Devon Energy, a gas processing company, expects to pay for 400,000 mmBtu of natural gas at a close of day on Friday, September 11th. They want to hedge their position with Henry Hub natural gas futures. Assume that they enter into the position at close of day on Tuesday, September 8th. The size of one natural gas futures is 10,000 mmBtu. Futures and spot data are provided in the file HW1_data.doc.

1. Describe the position they should enter (long or short, contract month).

2. Compute the hedge ratio using data from Data_hw1.xls file.

3. How many contracts do they need to buy or sell?

4. Document the price gain or loss every day that their position is open.

5. What is the total cost after they have closed out their futures position, and made their payment?

6. What is the effective cost per mmBtu?

1. Do the following exercises from the book:

Chapter 2: 2.30

Chapter 3: 3.30

2. You expect to receive 40,000,000 Japanese Yen on close of business day, Friday, September 11th. You decide to hedge your risk with the futures contracts. Assume you that you enter into the futures position at a close of day on Tuesday, September 8th. Futures and spot data are provided in the file HW1_data.doc. Contract size is 12,500,000 yen.

1. Describe the position you decide to enter (long or short).

2. Describe the contract (what month, and what quantity).

3. Document the gain or loss due to marking to market every day that your position is open.

4. What is the total cost in US$ after you have closed out your futures positions, and made your payment?

5. What would have been the total cost in US$, if you had not hedged? Did you benefit from hedging?

6. What was the effective cost per JPY?

7. What would have been the total cost in US$ if you could have bought (or sold) a contract for exactly the amount you wanted to hedge (40,000,000 Yen)?

8. Identify problems with your hedge. When do you think it is useful to hedge using futures and when it is not?