What would be the price of these options

Reference no: EM132144120

Question - Gamma Energy is an oil producing company that owns an oil field from which it can deliver 10 mln barrels of oil per year for the next four years. The current oil price is USD 75 per barrel. Extraction costs are currently USD 60 per barrel.

Ignoring storage costs for oil, assuming volatility of the oil price is 20% and the (continuously compounded) interest rates for maturities of 1, 2, 3, and 4 years are 1.50%, 1.75%, 2.00% and 2.40% respectively. The convenience yields for oil for maturities of 1 up to 4 years are 4.0%, 2.0%, 1.0% and 0.5% (annually) respectively.

1. If Gamma wants to hedge the downside of its exposure, but remain the upside, what plain vanilla options could it use? What would be the theoretical price of the options?
Gamma has as a policy that once the oil price falls below USD 60 (production costs), it will stop producing.

2. If this is the policy, and Gamma wants to hedge its risk with options, what exotic options would you recommend. What would be the price of these options?

3. Gamma wants to insure itself against oil prices below USD 75, but needs this to be effective only when the oil price falls below USD 60. What option do you suggest and what would be the price of these options?
Gamma beliefs that once the oil price exceeds USD 100, it will not fall below USD 75 again, and there is no need for a hedge.

4. If this belief is correct, what exotic option would you suggest to Gamma, and what would be the price? Gamma is exposed to the oil price at the end of each of the coming four years.

5. Suppose it wants to hedge itself with an option on the average of those four oil prices against the current price of USD 75 (the exercise price). What is the price of this option?

Reference no: EM132144120

Questions Cloud

Discuss statement- the market can solve all of society needs : Principles of Financial Investment Assignment - "The market can solve all of society's needs." Discuss the above statement

Discuss your impressions of the plimoth plantation : How balanced does it seem to be? What did you find most interesting? Did you learn anything new? Your answer should be about two paragraphs long.

Assess the security and the operational needs : Assess the security and the operational needs for controlling wireless transmissions. How does this change in a personal, small-office, or large-enterprise.

Drug stays in the system for more : A: There is sufficient evidence at the 0.02 level of significance that the drug stays in the system for more than 339 minutes.

What would be the price of these options : If this is the policy, and Gamma wants to hedge its risk with options, what exotic options would you recommend. What would be the price of these options

Explain the needed advancements in detail : Assess which areas of wireless standards are in most need of advancements. Explain the needed advancements and how that will advance the wireless technology.

Conduct research around the event you chose : After reviewing the Unit VII materials, you should be familiar with some events that shaped Western Expansion and the Antebellum South.

The probability that a randomly selected person : The probability that a randomly selected person has owned his or her old TV for more than 4.14.1 years is what percent?

Explain the concept of layers of security : An important principle in information security is the concept of layers of security, which is often referred to as layered security, or defense in depth.

User Account

All Pages