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Finance Assignment | Professional Writing

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May 27th, 2020

The spot price for gas today (March 19, 2020) is $1.661 MMBtu. The futures price today for gas to be delivered in June 2021 is $2.245. Your company is a gas purchaser/user and is interested in the hedging process. a. Your Company would like to enter into a June 2021 contract for 10,000 MMBtus. Would your Company go short or go long on the June 2021 futures contracts? b. Looking into the future, assuming it is June 2021. If the spot price in June 2021 turned out to be $2.500, how much better off or worse off (in terms of total dollars spent on gas) is your Company as a result of entering into the futures contract? c. Your Company decides to enter into an option as a hedging tool. An option for 10.000 MMBtu in June 2020 at a strike price of $2.300 is available today at a price of $0.200.

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Would your Company be interested in a call or put option? d. Looking into the future, assuming is it June 2021. Assuming you purchased the option in parte. If the spot price in June 2021 turned out to be $2.550 what would be the total amount paid by your Company for the 10,000 MMBtus (including the cost of the option)? e. You are a speculator and believe the price of gas will increase. You have a chance to buy a June 2021 futures contract at $2.245. Would you go short or go long on a June 2021 futures contract for 10,000 MMBtus? f. It is now December 31, 2020 On this day, the spot price for natural gas is S2.450 per MMBtu and the June 2021 futures price is $2.310 per MMBtu. What is the amount of gain or loss related to your contract as of December 31, 2020? g. As a speculator the last thing you want to do is either take delivery of or actually sell natural gas. Explain how you would get out of the contract you purchased in part e. prior to the June 2021 delivery date.

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