You work for an industrial company in Iowa that uses a lot of natural gas in its production process. You are in charge of procuring natural gas. The CEO is concerned that fluctuations in natural gas prices are causing volatility in company earnings. You suggest to her that earnings could be stabilized by purchasing natural gas futures contracts.

1. a) In February 2018, the CEO decides to have the company purchase futures contracts for 50,000 MMBTU of gas delivery at Henry Hub in September 2018. The current price of that contract is $3.40/MMBTU. The company typically uses about 50,000 MMBTU of gas in a month. When September comes, the spot price of natural gas at Henry Hub is $3.75/MMBTU and the spot price of natural gas in Iowa is $3.85/MMBTU. The companys business has also slowed down and it is now using only 40,000 MMBTU of gas per month. The CEO is trying to figure out how to price the companys products. In order to do that she needs to know its marginal cost of production. The CEO asks you what natural gas price the company should use in calculating its marginal cost of production. What do you tell her?