Answer :
The hedge can be considered successful as it mitigated the impact of the declining NG prices on the firm XYZ.
To analyze the hedge, let's construct a time table:
NOV 11, 2021:
Spot Price: $4.95/unit
MAR 2022 Futures Price: $4.65/unit
FEB 15, 2022:
Spot Price: $4.50/unit
MAR 2022 Futures Price: $4.40/unit
To calculate the hedge result, we need to consider the number of units and the price differential between the spot and futures prices.
Number of Units: 1,000,000 units
Gain/Loss on Spot Position:
Spot Gain/Loss = (Spot Price on FEB 15 - Spot Price on NOV 11) * Number of Units
Spot Gain/Loss = ($4.50/unit - $4.95/unit) * 1,000,000 units
Spot Gain/Loss = -$0.45 * 1,000,000
Spot Gain/Loss = -$450,000
Gain/Loss on Futures Position:
Futures Gain/Loss = (Futures Price on FEB 15 - Futures Price on NOV 11) [tex]\times[/tex] Number of Units / h
Futures Gain/Loss = ($4.40/unit - $4.65/unit) [tex]\times[/tex] 1,000,000 units / 1
Futures Gain/Loss = -$0.25 [tex]\times[/tex] 1,000,000
Futures Gain/Loss = -$250,000
Total Hedge Result:
Hedge Result = Spot Gain/Loss + Futures Gain/Loss
Hedge Result = -$450,000 + (-$250,000)
Hedge Result = -$700,000
The negative hedge result indicates a loss of $700,000. However, the purpose of the hedge is to protect against declining NG prices. Without the hedge, the loss on the spot position alone would have been higher at -$450,000. The loss on the futures position, while negative, partially offset the spot position loss, resulting in a smaller net loss.
Therefore, the hedge can be considered successful as it mitigated the impact of the declining NG prices on the firm XYZ.
Learn more about hedge here: brainly.com/question/32380539
#SPJ11
