EBF 301
Global Finance for the Earth, Energy, and Materials Industries

Lesson Activities

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Basic Energy Risk Hedging

Physical (cash) vs. Financial Prices and Hedging

Start with setting up the following table:

  • Go to the NYMEX and find the last available date (D2) close price (P2) for the front-month crude oil futures contract.
  • Click on the chart icon right next to the “last” price. Make sure the chart is in the “Dynamic” mode.
  • Find the close price (P1) for exactly three months before the last day (D1).
  • Go to the EIA website and find WTI - Cushing, Oklahoma spot price data.
  • Find the last day’s crude oil spot price (P4).
  • Find the oil spot price three months before the last day (P3).
  • Include the screenshot for both NYMEX and cash market.
  • Set up the following table.
Spot Price Futures Price
D1 P3 P1
D2 P4 P2

Short Hedge

Assume you are working for an oil producing company and the date is D1. You are planning to deliver and sell 100,000 barrels of crude oil to the spot market on D2. You want to hedge the company’s revenue against the price fluctuations.

  • Explain what steps you will take.

Assume time passes and date is D2.

  • How much money will you lose or gain without hedging?
  • How much money will you lose or gain with hedging?
  • Note: you can assume the P3 as your price goal.

Long Hedge

Assume you are working for a refinery and the date is D1. The company is planning to buy 100,000 barrels of crude oil in the Gulf Coast spot market on D2. You wish to hedge the company’s revenue against the price fluctuations.

  • Explain what steps you will take.

Assume time passes and date is D2.

  • How much money will you lose or gain without hedging?
  • How much money will you lose or gain with hedging?
  • Note: you can assume the P3 as your price goal.

Grading Criteria

This activity is worth up to 20 points on the EBF 301 grading scale. You will earn up to 4 points for the data gathering part. You will need to include four screenshots of the prices (P3 and P4 for spot market, P1 and P2 for NYMEX). Then you need to calculate the gain and loss under short and long hedges (8 points each).


Fundamental Factors

The Fundamental Factors activity is due as usual this week, at 11:59 pm on Sunday, and is worth 30 points on the EBF 301 grading scale. Please refer to the Fundamental Factors Instructions for additional information and grading rubric.


Quiz

Return to Canvas to complete the L7 Quiz.

Submitting Your Work

Basic Energy Risk Hedging: Submit your work as a single Word document to the Lesson 7 Hedging Activity in Canvas.

Fundamental Factors: Submit your work as a single Word document to the Lesson 7 Fundamental Factors Activity in Canvas.

Quiz: Take the quiz in Canvas.