GMC INC. is a US oil refinery that operates on a multinational scale in both producing...

 

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GMC INC. is a US oil refinery that operates on a multinational scale in both producing and selling crude oil. It is currently August 31 2020, and the firm anticipates selling 500,000 barrels of crude oil to a US firm on February 18 2021. The current spot price for crude oil is $124/bl. GMC INC. are also expecting to receive £300m for the sale of 2,000,000 barrels of crude oil to a UK automobile company in four months. The current spot rate is $1.55/£. In order to hedge against price exposure on the crude oil spot market, and foreign currency risk, the firm has the following Future and European Foreign Currency Option contracts available: Crude Oil Futures Expiry Price Term 1,000 Barrels 1,000 Barrels 1,000 Barrels 30/09/2020 $120/bl 31/12/2020 S124/bl 31/03/2021 $126/bl Foreign Currency Options Call premium Exercise Price 31/12/2020 $1.54/£ 31/03/2021 $1.55/£ 30/06/2021 $1.56/£ Expiry Put premium $0.06 $0.04 $0.08 $0.05 $0.12 $0.07 Required: a) Calculate the effective revenue for the sale of 500,000 barrels of crude oil, assuming that GMC INC used futures to fully hedge their exposure to price risk. The spot price and futures price on February 18, 2021 are $120/bl and $123/bl, respectively. You must verify your answer using basis or the mechanics of the hedge. [30 marks) b) Compute the efficiency of the hedging strategy chosen in part a). [30 marks) c) Calculate the net revenue from the receipt of £300m under the assumption GMC INC used a Foreign Currency Option to hedge against exchange rate risk. Your answer should provide two scenarios, one where the option is exercised, and another when the option is thrown away. (30 marks) d) Under what circumstances might the futures price be greater than the current spot price? [10 marks] GMC INC. is a US oil refinery that operates on a multinational scale in both producing and selling crude oil. It is currently August 31 2020, and the firm anticipates selling 500,000 barrels of crude oil to a US firm on February 18 2021. The current spot price for crude oil is $124/bl. GMC INC. are also expecting to receive £300m for the sale of 2,000,000 barrels of crude oil to a UK automobile company in four months. The current spot rate is $1.55/£. In order to hedge against price exposure on the crude oil spot market, and foreign currency risk, the firm has the following Future and European Foreign Currency Option contracts available: Crude Oil Futures Expiry Price Term 1,000 Barrels 1,000 Barrels 1,000 Barrels 30/09/2020 $120/bl 31/12/2020 S124/bl 31/03/2021 $126/bl Foreign Currency Options Call premium Exercise Price 31/12/2020 $1.54/£ 31/03/2021 $1.55/£ 30/06/2021 $1.56/£ Expiry Put premium $0.06 $0.04 $0.08 $0.05 $0.12 $0.07 Required: a) Calculate the effective revenue for the sale of 500,000 barrels of crude oil, assuming that GMC INC used futures to fully hedge their exposure to price risk. The spot price and futures price on February 18, 2021 are $120/bl and $123/bl, respectively. You must verify your answer using basis or the mechanics of the hedge. [30 marks) b) Compute the efficiency of the hedging strategy chosen in part a). [30 marks) c) Calculate the net revenue from the receipt of £300m under the assumption GMC INC used a Foreign Currency Option to hedge against exchange rate risk. Your answer should provide two scenarios, one where the option is exercised, and another when the option is thrown away. (30 marks) d) Under what circumstances might the futures price be greater than the current spot price? [10 marks]

Answer rating: 100% (QA)

a Calculate the effective revenue for the sale of 500000 barrels of crude oil assuming that GMC INC used futures to fully hedge their exposure to price risk The spot price and futures price on Februar... View the full answer