Question
Explore Corporation, an independent oil and gas exploration and production company decides to hedge part of their crude oil production using a collar. Management has
Explore Corporation, an independent oil and gas exploration and production company decides to hedge part of their crude oil production using a collar. Management has decided they want to lock in a minimum price of $49.00 for the revenue they will receive for 100,000 barrels of production (for this problem assume production occurs in 1 year, this is of course an oversimplification). The company has also decided based upon their view of where oil prices are going that they are willing to structure the collar so they will receive a maximum of $55.00 per barrel. Assume that Put options with a strike price of $49.00 and $55.00 exist and that Call options with a strike price of $49.00 and $55.00 also exist. The Puts and the Calls all expire in 1 year. Sketch the payoff diagram for the collar strategy they should execute based upon the criteria they desire.
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