Devon Energy, a gas processing company, expects to pay for 400,000 mmBtu of natural gas at the close of day on Friday, September 16th. They want to hedge their position with Henry Hubs natural gas futures. Assume that they enter into the position at the close of day on Tuesday, September 13th. The size of one natural gas futures is 10,000 mmBtu. Futures and spot data are provided in the file HW1_data.doc. a. Describe the position they should enter (long or short, contract month). b. Compute the hedge ratio using data from Data_hw1.xls file. c. How many contracts do they need to buy or sell? d. Document the price gain or loss every day that their position is open. e. What is the total cost after they have closed out their futures position, and made their payment? f. What is the effective cost per mmBtu?

data:

Henry Hub Natural Gas Futures Data

Trade Date:Wednesday, 09/13/2023

Month	Open	High	Low	Last	Change	Settle	Estimated Volume	Prior Day Open Interest
OCT 23	2.73100	2.77600	2.66100	2.68100	-.06300	2.68000	122,952	136,551
NOV 23	3.08100	3.18200	2.91600	2.97300	-.02800	2.98700	89,237	259,475
DEC 23	3.59600	3.69700	3.35700	3.43100	-.00900	3.43600	34,446	65,905

Trade Date:Friday, 09/15/2023

Month	Open	High	Low	Last	Change	Settle	Estimated Volume	Prior Day Open Interest
OCT 23	2.70400	2.73600	2.63700	2.64300	-.06400	2.64400	127,780	122,898
NOV 23	2.98700	2.99700	2.92700	2.92700	-.05100	2.93200	87,637	249,848
DEC 23	3.40100	3.41700	3.33700	3.33800	-.06600	3.34500	30,857	75,975

Spot Data:

2023/09/122.72

2023/09/132.73

2023/09/142.61

2023/09/152.68