Collar hedge: Using the NYMEX Crude Oil Call and Put information in the Appendix
ID: 1175738 • Letter: C
Question
Collar hedge: Using the NYMEX Crude Oil Call and Put information in the Appendix, answer the questions below.Lauren Simkins E&P wishes to construct a collar hedging strategy. Lauren Simkins, the CEO, tells you she wants you to construct a hedge to protect the firm from declining crude oil prices for upcoming production. The CEO states that you are to buy a put option that gives crude oil price protection for a minimum of $100 per barrel. She tells you to sell an offsetting call so that your total hedging strategy costs no more than 50 cents total per barrel (i.e., total premium paid on the put minus the premium received on the call is no more than 50 cents net paid per collar). Which call and which put did you select? Pick the best collar. List the collar below and tell the total cost of the collar strategy APPENDIX IDE OIL CALL OPTIONS FOR NYMEX WTI CRUDE OIL per bbl OPTION PREMIUM. Strike Price Type Last Change Prior Settle High Low Volume Prices are for March 17, 2012. The spot price for WTI crude oil was at $107.06 OR EERCISESIN THIS CHAPTER, USE THE PRIOR SETTLE PRICE AS THE CALL _ CALL _ CALL _ CALL - CALL _ CALL _ CALL- CALL _ CALL _ CALL _ CALL CALL _ 9350 9400 9450 9500 14.33 13.86 13.39 12.92 12.45 11.99 11.52 11.07 10.62 10.17 9.73 9.29 734 100 399 9600 9650 9700 9750 9800 9850 9900 100 761 347 759 724 217 485 Continued)
Explanation / Answer
collar strategy
buy put option of strike 100.00 and sell call option of 121.00 to maintain a premium difference of 0.5 per collar
i.e. premium paid buying on put of 100.00 = (0.85)
premium received on selling call of 121.00 = 0.35
difference of outflow = (0.5)
assuming scenarios
let crude price fell from spot S0 = 107.06 to 90
options exercised payoff from 100.00 pe payoff from 121.00ce net
put will be exercised 10 - 10
and call lapses.
on selling crude in market fetches 90
total inflow 100
premium paid (0.5)
net inflow 99.5$
in this way the company can be hedged if having a fear of fall in price of crude oil.