Fracture Corporation, an independent oil and gas exploration and production company decides to hedge part of their crude oil production. To keep things simple assume the oil will be produced and sold exactly 1 year from today and that this will equal 1 million barrels. Management has decided to lock in a minimum price of S50.00 they will receive for the 1 million barrels of production. They decide to use a collar strategy and likewise agree to let S65 per barrel be the most they receive on the million barrels hedged. Assume that puts and calls on oil futures are actively traded and that a variety of exercise prices between S40 and S70 are available. Also assume that the number of barrels per contract equals 1,000 and that basis risk is not an issue a) Describe the strategy they will follow and sketch the payoff diagram for the strategy. b) What would need to be true to make the strategy a 'costless' collar? Fracture Corporation, an independent oil and gas exploration and production company decides to hedge part of their crude oil production. To keep things simple assume the oil will be produced and sold exactly 1 year from today and that this will equal 1 million barrels. Management has decided to lock in a minimum price of S50.00 they will receive for the 1 million barrels of production. They decide to use a collar strategy and likewise agree to let S65 per barrel be the most they receive on the million barrels hedged. Assume that puts and calls on oil futures are actively traded and that a variety of exercise prices between S40 and S70 are available. Also assume that the number of barrels per contract equals 1,000 and that basis risk is not an issue a) Describe the strategy they will follow and sketch the payoff diagram for the strategy. b) What would need to be true to make the strategy a 'costless' collar