FIN 3480. Homework #3 Energy Hedging You are an oil producer. (You pull oil out of the ground and sell it to an oil refinery) Today, you estimate your oil production be as follows: Jan 2018 10,000 barrels Feb 2018 12,000 barrels Mar 2018 15,000 barrels You wish to hedge your production The current oil pricing curve looks like this: Jan $52.00 per barrel Feb $53.25 per barrel Mar $54.55 per barrel You elect to hedge Jan and Feb by a straight swap (floating for fixed rate) and Mar by purchasing an option. The premium for a Mar18 option Call is: $1,000 per 1000 barrels. The premium for a Mar18 option Put is: $500 per 100 barrels Question: On Jan 31, 2018 the spot price of a barrel of oil is $48.25. What is your net dollar settlement of the Jan hedge? 1. On Feb 28, 2018 the spot price of a barrel of oil is $59.45. What is your net dollar settlement of the Feb hedge contract? 2. On Mar 31, 2018 the spot price of a barrel of oil drops to $38.75. Do you exercise your option? What is the net dollar settlement of the option if exercised? 3