Producer Costless Collar

Producer Costless Collar - Producer Asian Options and Vol...

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1 Producer Asian Options and Vol Spreads FINC 782: Professor McNew Producer Hedging Using Costless Collars See file costlesscollar.xls 07 Nov 06
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2 Producer Asian Options and Vol Spreads FINC 782: Professor McNew Our Producer is seeking price stability. He will sell a cap (call) and buy a floor (put) for exactly the same premium. The floor is set first: this is the absolute lowest price the producer will accept for his natural gas. This is the most important piece for the producer. The cap is set second. The cap allows the producer to participate is some upside price movement if the market happens to appreciate. We will allow Kiodex to set the cap (strike) such that the collar is zero cost. Why Use an Asian Option for Producer Risk?
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3 Producer Asian Options and Vol Spreads FINC 782: Professor McNew Creating the Costless Collar 1. Trade Pricing Option Strategy 1. Buy floor first 2. Option 1 is buying the floor (the put option). The floor is the absolute minimum price the producer will accept. We set it at $6.00 for this example.
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