Extol corp. expects to produce 10,000 barrels of oil for delivery in December 2015. The company has decided to hedge the price of oil they will receive. The December 2015 NYMEX light sweet crude futures settling at $91.50 a barrel. The contracts are for 1000 barrels each. You decide to hedge 10,000 barrels with this futures contract.

a. Under each of the following scenarios, show the cash flow payoff from the futures contracts of your futures position and the total cash flow to the company under each of the spot price scenarios. Please analyze each of your positions in this problem individually, i.e. as if the other position did not exist; and then simply add up the values of the two positions to get the total value under each scenario.

	December 2015 Spot Oil Price, $$ per bbl
	100	109	120
Cash flow from futures position
Cash flow from sale of oil at spot price
TOTAL

Problem B

A refiner, Ref Inc., needs to buy 100,000 barrels of oil 1 year from today and again 2 years from today.

The forward prices for delivery of oil in 1 year and 2 years are $91.40 and $81.41

1- and 2-year default risk free zero-coupon bond yields are .10% and .50%

A bond paying $1 at the end of yr. 1 and which matures at that date has an annual yield of .10%

A bond which pays nothing at the end of yr. 1, but which pays $1 at the end of yr. 2 at which date it matures has an annual compound yield of .50%

Compute the fixed swap price you would agree to pay for a 2-year swap agreement with a bank (assume all cash flows occur at the end of the year).

Suppose the spot price of oil at the end of the second year equals $92. How much do you receive or pay to the bank (the counterparty). What is the effective price you pay for one barrel under the swap agreement?