Question 24 (3 points)

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Congratulations You have just landed a new job in the finance department at a chemical company in Texas (yes Ive had students get jobs in this industry and work in the finance department!) Your new boss asks you to hedge natural gas price risk for their power generation needs. [Yikes! You now wish you had paid more attention to Dr. Simkins when she covered this topic in class!] Your firm has not hedged in the past and last year, the board of directors became concerned and told management to start hedging at least 25% of commodity price risk for natural gas.

Your boss wants you to hedge using 1000 natural gas futures contracts (which is at least 25% of your natural gas needs) for July. It is now February 15^th and the cash (spot) price for natural gas is $3.00 per mmbtu. The July futures contract for natural gas is $2.90 per mmbtu. Use the July contract to hedge. Go long or short the required number of futures contracts. On July 15^th, you close out the futures position at $3.47 per mmbtu (i.e., the futures price to offset your position) and purchase the natural gas in the spot market. Natural gas cash prices are $3.32 per mmbtu on July 15^th.

Answer the following questions:

A. WHAT IS THE BASIS ON FEB. 15TH?

B. WHAT IS THE BASIS ON JULY 15TH?

C. DID THE CHANGE IN THE BASIS BENEFIT THE HEDGER OR HARM THE HEDGER?

Hint: This question is similar to Question 10 in Chapter 16. Also, refer to Exhibit 16.4.

Question 24 options:

A)	A. $-0.10; B. $0.15; C. HARM

B)	A. $-0.10; B. $0.15; C. BENEFIT

C)	A. $-0.10; B. $0.15; C. NO IMPACT

D)	A. $0.10; B. $-0.15; C. HARM

E)	A. $0.10; B. $-0.15; C. BENEFIT

F)	A. $0.10; B. $-0.15; C. NO IMPACT