Question
MGRM created a market by selling long-term forward contracts. Assuming the prices for oil given the first traded day in 2000, MGRM entered into a
MGRM created a market by selling long-term forward contracts. Assuming the prices for oil given the first traded day in 2000, MGRM entered into a deal to sell yearly forward contracts for delivery to an unspecified counterparty over the next 10 years (100 contracts for each year). Instead of hedging with the stack-and-roll strategy using futures contracts, MGRM hedged used 1-year ATM call contracts.
If you used a closed form solution versus the binomial tree approach, how different would the cost be (just do the matched-strip)? Briefly explain why?
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