1. Western Petroleum has reserves of 200,000 barrels of oil that can be extracted at the end of one year. The current spot price of crude oil is $50 per barrel and CPs cost of extraction is $20 per barrel. The risk-free rate is 4% per year (EAR), the net convenience yield for oil is assumed to be 2% per year (EAR), and the volatility for oil is 40% per year. CP has fixed costs of $4 million next year. (Assume all revenues and costs occur at the end of each year.)
   1. If CP hedges its fixed costs using forward contracts, how much free cash would it have next year if the oil price turns out to be $75 per barrel?

2. If CP hedged its fixed costs using European put options with a strike price of $45 per barrel, how much free cash would it have next year if the oil price turns out to be $75 per barrel?