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Suppose that you distribute gasoline to residences in Korea. Fearing increases in crude oil price, you decide to lock-in the price that you will pay

Suppose that you distribute gasoline to residences in Korea. Fearing increases in crude oil price, you decide to lock-in the price that you will pay for gasoline over the next 12 months. Your demands for gasoline over the next year will be 200 million liters for months 1 to 4, 180 million liters for months 5 to 8, and 150 million liters for the rest of the year. A commodity swap dealer has promised to deliver for the gasoline that you need at a xed price of KRW 1,790 per liter. Compute swap dealer's margin assuming he hedges using forward contracts. The gasoline forward curve is ft = 1750 + 100 ln(1 + t) and the zero-coupon yield curve for risk-free bonds is rt = 0:03 + 0:01 ln(1 + t)

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4. (20 points) Suppose that you distribute gasoline to residences in Korea. Fearing increases in crude oil price, you decide to lock-in the price that you will pay for gasoline over the next 12 months. Your demands for gasoline over the next year will be 200 million liters for months 1 to 4, 180 million liters for months 5 to 8, and 150 million liters for the rest of the year. A commodity swap dealer has promised to deliver for the gasoline that you need at a fixed price of KRW 1,790 per liter. Compute swap dealer's margin assuming he hedges using forward contracts. The gasoline forward curve is fi 1750100 In(1 t) and the zero-coupon yield curve for risk-free bonds is rt = 0.03 + 0.01 ln(1 +1)

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