We appreciate your visit to Q1 On November 11 firm XYZ had a contract to buy 1 million units of Natural Gas NG on February 15 2022 One NG futures. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!
Answer :
The hedge can be considered successful as it mitigated the impact of the declining NG prices on the firm XYZ.
To analyze the hedge, let's construct a time table:
NOV 11, 2021:
Spot Price: $4.95/unit
MAR 2022 Futures Price: $4.65/unit
FEB 15, 2022:
Spot Price: $4.50/unit
MAR 2022 Futures Price: $4.40/unit
To calculate the hedge result, we need to consider the number of units and the price differential between the spot and futures prices.
Number of Units: 1,000,000 units
Gain/Loss on Spot Position:
Spot Gain/Loss = (Spot Price on FEB 15 - Spot Price on NOV 11) * Number of Units
Spot Gain/Loss = ($4.50/unit - $4.95/unit) * 1,000,000 units
Spot Gain/Loss = -$0.45 * 1,000,000
Spot Gain/Loss = -$450,000
Gain/Loss on Futures Position:
Futures Gain/Loss = (Futures Price on FEB 15 - Futures Price on NOV 11) [tex]\times[/tex] Number of Units / h
Futures Gain/Loss = ($4.40/unit - $4.65/unit) [tex]\times[/tex] 1,000,000 units / 1
Futures Gain/Loss = -$0.25 [tex]\times[/tex] 1,000,000
Futures Gain/Loss = -$250,000
Total Hedge Result:
Hedge Result = Spot Gain/Loss + Futures Gain/Loss
Hedge Result = -$450,000 + (-$250,000)
Hedge Result = -$700,000
The negative hedge result indicates a loss of $700,000. However, the purpose of the hedge is to protect against declining NG prices. Without the hedge, the loss on the spot position alone would have been higher at -$450,000. The loss on the futures position, while negative, partially offset the spot position loss, resulting in a smaller net loss.
Therefore, the hedge can be considered successful as it mitigated the impact of the declining NG prices on the firm XYZ.
Learn more about hedge here: brainly.com/question/32380539
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