Economics Homework Help

Here is a little secret… MGRM is back (and has been back for a while…they had reopened the oil hedging program…but with a twist.

They are selling 10 year forward contracts, with quarterly oil delivery…..but hedged the exposure with ATM quarterly options.

Take the following example.

• MGRM sells a 10 year forward at the start of 2012. They delivery the required barrelseach quarter…so on the expiry dates of March, June, Sept, and December.
• Global Shipping Enterprise (GSE) came to them at the start of 2012, wanting to hedge120,000,000 barrels of oil over the 10-year window.

• Explain the performance difference of using options to hedge versus futures contracts over this time period….(qualitative question)