Question
Devon Energy, an E&P company has constructed a zero cost collar strategy last summer. They bought a put option on crude oil with a premium
Devon Energy, an E&P company has constructed a zero cost collar strategy last summer. They bought a put option on crude oil with a premium of $0.50 per barrel and a strike price of $50 per barrel and sold a call option, strike price of $70 per barrel, with the same premium. If crude oil is $40 per barrel at maturity of the hedge, how much do they make or lose on the option hedge per barrel and per contract? Remember that this is a zero cost collar hedge.
CHOOSE THE BEST ANSWER! Question 23 options: A) They make $10 per barrel on the hedge. B) They make $9.50 per barrel on the hedge. C) They lose $9.50 per barrel on the hedge. D) They lose $10 per barrel on the hedge.
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