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Topic_19_E1 - Topic 19 Exercise 1 Hedging for Commodity...

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Topic 19, Exercise 1 Hedging for Commodity Prices Firms use a variety of hedging techniques to manage their risks. They can use futures contracts, option contracts, swaps, insurance contracts and exotic instruments to hedge various types of risk. In “Cover Your Assets,” the author describes some hedging activities by commodity firms. These are companies that produce products influenced by commodity prices. Example of these types of firms include oil and gas production firms and firms involved with the gold industry. 1. Apache Corporation used a “costless collar” to establish an acceptable range of prices for natural gas that was acquired in an acquisition. Describe that transaction with respect to what a costless collar is, the range of prices that it locked in and the potential cost of the hedge. A costless collar involves the purchase of a put and the sale of call option. The cost of the put option is covered by the price that is recovered in the sale of the call. The costless
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