Texoil This worksheet illustrates the hedging strategy of an

Oil Prices Drop oil company committed to deliver 1 mio bl every 6

Convenience Yield Constant month at a fixed price of $70/bl for 2 years
Qtity 1,000
FixedP 70
Table 1: Spot and futures price evolution
Date SpotPric IntRate r Delta u-y Future Prices
0.5 1 1.5 2
0 65 4% -2% 65.65 66.31 66.98 67.65
0.5 60 4% -2% 60.60 61.21 61.83
1 60 4% -2% 60.60 61.21
1.5 60 4% -2% 60.60
2 60 4% -2%

Table 2: Unhedged position

Date SpotPric Sales CofSales NetIncome
0 65
0.5 60 70,000 60,000 10,000
1 60 70,000 60,000 10,000 Table 3 illustrates the
effectiveness of hedging using a
1.5 60 70,000 60,000 10,000
strip of forward contracts. All
2 60 70,000 60,000 10,000 risks are eliminated.
Table 4 illustrates hedging with a
Table 3: Strip hedge using forward strip of futures contracts. For the
Date SpotPric NetIncome CF forwardTotal CF CashAccount sake of simplicity, marking to
0 65 0 market is semiannual. Notice the
0.5 60 10,000 -5,653 4,347 4,347 difference in the timing of cash
flows. Total CF is known, timing
1 60 10,000 -6,313 3,687 8,121
is uncertain.
1.5 60 10,000 -6,980 3,020 11,306
2 60 10,000 -7,653 2,347 13,882
13,401
Table 4: Strip hedge using futures - Semiannual marking to market
Date NetIncome 6m 1y 1.5y 2y CF hedge Total CF CashAcc
0 65 0
0.5 60 10,000 -5,653 -5,710 -5,767 -5,825 -22,956 -12,956 -12,956
1 60 10,000 -603 -609 -615 -1,827 8,173 -5,045
1.5 60 10,000 -603 -609 -1,212 8,788 3,641
2 60 10,000 -603 -603 9,397 13,111
Total -5,653 -6,313 -6,980 -7,653 13,401

Table 5: Stack hedge

Date Price NetIncome Stack Cfhedge Total CF CashAcc. The stack hedge is very similar
0 65 4,000 0 to a strip of futures contracts.
0.5 60 10,000 3,000 -22,613 -12,613 -12,613
1 60 10,000 2,000 -1,809 8,191 -4,677
1.5 60 10,000 1,000 -1,206 8,794 4,023
2 60 10,000 -603 9,397 13,501
13,769
Metallgesellschaft - Numerical illustration
Sensitivity analysis

Initial values
Spot price 18
Delta u-y -10%
New Values t=0.5
Spot price 0 23 23 18 18
Delta u-y 0 -10% 10% -10% 10%

Cash Account year 2

Strip hedge forwards 12.76 12.76 12.76 12.76 12.76
Strip hedge futures 12.87 13.62 14.26 12.11 12.47
Stack hedge 12.98 14.53 -0.10 11.43 3.17