Final Study Questions

Question 1

Which formation is of the most concern for earthquakes

Answer 1

Arbuckle

Question 2

__________ are finanTerrycial instruments (contracts) that do not represent ownership rights in any asset. Rather, they derive their value from the value of some other underlying commodity or other asset.

Answer 2

derivatives

Question 3

_____________ is a market situation where prices are progressively lower in distance delivery months.

Answer 3

Backwardation

Question 4

A collar is commonly used as a risk management tool. To construct the correct collar transaction for a firm, the company must understand the fundamental ____________________ position that the firm want to risk mitigate.

Answer 4

instrument (underlying)

Question 5

A firm that is fundamentally long the instrument or long the underlying commodity such as oil, would buy (go long) ___________ and sell (go short) _________ to create a collar.

Answer 5

put, call

Question 6

A market is said to be “liquid” when it has a low level of trading activity and open interest. True or False

Answer 6

FALSE

Question 7

A trader who has a ____ position in crude oil futures believes the price of crude oil will ___ in the future.

Answer 7

long/increase

Question 8

A. If COP hedged 25% of “Total Production, Oil (MMbbls)” as shown in Capital IQ, what would be the millions of barrels hedged?B. How many futures contracts would they need if they hedged using futures?

Answer 8

A. 65.8 million barrels; B. 65,800 contracts

Question 9

A. If crude oil prices rise to $135, how much will they make or lose on the collarstrategy above, on a per barrel basis (and state whether profit or loss)?B. If crude oilprices fall to $70, how much will they make or pay out on the option collar on aper barrel basis?C. If they buy the crude oil in the cash market, how much will bethe net amount they pay for crude oil (assume it is a perfect hedge) on a per barrelbasis?

Answer 9

A. $17.00 per barrel profit; B. $27.00 per barrel loss; C. $97.00 effective cost of crude oil.

Question 10

According to this article, what led Mexico to first hedge oil?

Answer 10

Saddam Hussein invading Kuwait

Question 11

According to this article, what style options does Mexico buy?

Answer 11

Asian

Question 12

According to this article, what was the first non-bank company Mexico hired for trading?

Answer 12

Royal Dutch Shell

Question 13

An E&P company wishes to hedge using a collar strategy. Which of the following strategies should be used?

Answer 13

Buy a put and sell a call

Question 14

Devon Energy, an E&P company has constructed a zero cost collar strategy last summer. They bought a put option on crude oil with a premium of $0.50 per barrel with a strike price of $50 per barrel and sold a call option at a strike price of $70 per barrel and the same premium. If crude oil is $80 per barrel at maturity of the hedge, how much do they make or lose on the option hedge per barrel and per contract? Remember that this is a zero cost collar hedge.

Answer 14

They lose $10 per barrel on the hedge ($10,000 per contract loss).

Question 15

Energy derivatives are traded on a variety of energy products. The largest single category consists of ______________.

Answer 15

petroleum (oil) derivatives

Question 16

Enron used two innovative but questionable accounting features to help hide their cash flow difficulties. These were ________________ and ____________________________.

Answer 16

Left to market and right to market accounting measures

Question 17

Explain how the the annual cost per kWh is calculated for alternative power sources including wind, fossil fuels, and nuclear. As part of your discussion, explain why it is important to make comparisons this way.

Answer 17

When coming up with the annual cost per kWh it is important to take into account the allocated annualized capital costs for the year, the annual operating costs, and the costs of any fuel sources for power plants and nuclear. It is important to take all of these expenses into account to get an accurate comparison of the total costs of generating power. In the case of wind and solar, it will only be the capital costs and maintenance, whereas nuclear and fossil fueled power plants will include fuel costs.

Question 18

For the first set of options discussed (around July 22, 2008) what was the upfront cost to the Mexican government?

Answer 18

$1.5 billion

Question 19

How do you calculate the market capitalization of a company?

Answer 19

market capitalization is the # of shares of stock outstanding multiplied by the current market price.

Question 20

In what year was the NYMEX Henry Hub natural gas futures contract launched?

Answer 20

1990

Question 21

Linn Energy is hedging their crude oil production and you have been instructed to implement the hedging program. Your supervisor, Bill Shanahan, has instructed you create a zero-cost collar, if possible, that gives price protection for a minimum of $104.00 per barrel based on the put strike price (a floor price) for the crude oil you are selling. Is it possible to construct a zero cost collar? If so, what call option do you sell? List the strike price and premium. Use the NYMEX crude oil call and put information in the Appendix of Chapter 16 to answer this question. Remember to use “Prior Settle” as the option premium in the Appendix.

Answer 21

No, it is not possible .

Question 22

Linn Energy is hedging their crude oil production and you have been instructed to implement the hedging program. Your supervisor, Bill Shanahan, has instructed you to buy an option that gives price protection for a minimum of $93.50 per barrel based on the strike price (a floor price) for the crude oil that you are selling. What option do you select (call or put), what is the strike price, and what is the premium on the option? Use the NYMEX crude oil call and put information in the Appendix of Chapter 16 to answer this question. Remember to use “Prior Settle” as the option premium in the Appendix.

Answer 22

Put option with strike price of $93.50 and a premium of $0.26 per barrel.

Question 23

Read Chapter 16, Question 10 on page 407. What is the net purchase price of jet fuel in cents per gallon, when the transactions are completely closed out in August?

Answer 23

73.68 cents per gallon

Question 24

Read Chapter 17, Discussion Question 6 at the end of the chapter (see page 423). What would be the profit to the refiner?

Answer 24

700000

Question 25

Refer to Exhibit 24.5, Panel A. Which type of energy had the lowest cost per kWh to produce electricity in July 2008?

Answer 25

coal

Question 26

Technical interview question:Austin Roberts wasinterviewing a company and to test her knowledge, they asked her the following question:If you are an upstream company and need to hedge the crude oil price risk using a futures contract, would you take a long position or short position in the futures contract?

Answer 26

short position

Question 27

The _________ is the price for immediate delivery while the_______ is the price for future delivery.

Answer 27

Spot price; forward price

Question 28

The California energy crisis of 2000-01 was a debacle in many ways, but one that should be a warning to all is the way regulators defined the de-regulated operations of utilities and power plant by not allowing for either to enter into long term supply arrangements. This eventually lead to the “gaming” and instability in power prices.

Answer 28

TRUE

Question 29

The Midwest Price Spike was eventually found to be a failure of what financial risk?

Answer 29

Credit Risk

Question 30

The NYMEX natural gas futures contract is settled by delivery of ________million British Thermal Unitsof natural gas.

Answer 30

10000

Question 31

The two major futures exchanges in the world are the NYMEX and ICE Futures (formerly, IPE).

Answer 31

TRUE

Question 32

There are two dominant crude oil futures contract: _________________ and _______________.

Answer 32

West Texas Intermediate traded on the NYMEX and Brent traded on ICE Futures

Question 33

This question is based on the reading: “States Strengthen Commitment to Lower Carbon Economy”, NextEra Energyinsight (April 17, 2019).Which of the following statements is consistent with the article?

Answer 33

Solar PV growth is now due more to economics-driven growth versus policy-driven growth.

Question 34

This true/false question is based on the reading: “The Sun May Never Set on U.S. Solar Empire”, NextEra Energyinsight (Nov. 15, 2017).The authors state that:”After several years of technology improvements and falling costs, the solar industry is maturing quickly, and the future for large - scale solar in the U.S. appears bright.”

Answer 34

TRUE

Question 35

What are TWEPCO’s options at this point? What would you recommend that the company do with regard to the wind generation project? Specifically, should TWEPCO proceed with the investment in wind power generation or not? Explain?

Answer 35

For TWEPCO to proceed with the investment, they would be taking on a speculative position in the commodities market. The market had already turned against them and there is no way to hedge the project such that it would be in the money. They should abandon their sunk costs and let the project go.l

Question 36

What company’s energy risk management disaster stunned Asian markets by disclosing it had lost $550 million on oil derivatives trades, when the company was suppose to be hedging? (Hint: from the reading “The 10 biggest energy risk management disasters of the past 20 years”.)

Answer 36

China Aviation Oil

Question 37

What hedge fund lost $6 billion on speculative natural gas trades, in particular the March-April spread trade known as the “widow maker” and then went out of business? (Hint: This is from the reading “10 biggest energy risk management disasters of the past 20 years”.)

Answer 37

Amaranth Advisors

Question 38

What is the name of the pattern we observe in the natural gas forward curve? (Hint: I describe this in my Powerpoint lecture on Introduction to Risk Management.)

Answer 38

head and shoulders pattern

Question 39

What is the name of the trading strategy that Brian Hunter of Amaranth held and led to it’s demise?

Answer 39

Widow Maker spread

Question 40

What is the trend in the levelized cost of energy (LCOE) for utility scale wind and solar power from 2009 to 2018?

Answer 40

Both have declined. Solar has dropped substantially more than wind in the $ per mega-watt-hour (MWh). Solar has approached wind to be $43 versus $42 per MWh for wind.

Question 41

What Tulsa OK based company was caught in the Merchant Meltdown?

Answer 41

Williams

Question 42

What was the payout of the hedge for 2015? (see graphic)

Answer 42

$6.4 billion

Question 43

Which commodity has the highest volatility that is described in Chapter 15 (and I also mentioned in class)?

Answer 43

Natural gas

Question 44

Which exchange had the first modern exchange traded energy futures contract and what was the year?

Answer 44

New York Cotton Exchange in 1971

Question 45

Which state leads in the amount of solar capacity in operation?

Answer 45

California

Question 46

Which state passed the nation’s first clean peak power standard, which requires peak power load to be served with a specified level of generation from renewable, energy storage, or demand resources?

Answer 46

Massachusetts

Question 47

Your boss wants you to hedge using 1000 natural gas futures contracts (which is at least 25% of your natural gas needs) for July. It is now February 15thand the cash (spot) price for natural gas is $3.00 per mmbtu. The July futures contract for natural gas is $2.90 per mmbtu. Use the July contract to hedge. Go long or short the required number of futures contracts. On July 15th, you close out the futures position at $3.47 per mmbtu (i.e., the futures price to offset your position) and purchase the natural gas in the spot market. Natural gas cash prices are $3.32 per mmbtu on July 15th.

Answer 47

Your boss wants you to hedge using 1000 natural gas futures contracts (which is at least 25% of your natural gas needs) for July. It is now February 15thand the cash (spot) price for natural gas is $3.00 per mmbtu. The July futures contract for natural gas is $2.90 per mmbtu. Use the July contract to hedge. Go long or short the required number of futures contracts. On July 15th, you close out the futures position at $3.47 per mmbtu (i.e., the futures price to offset your position) and purchase the natural gas in the spot market. Natural gas cash prices are $3.32 per mmbtu on July 15th.

Question 48

Your boss wants you to hedge using 1000 natural gas futures contracts (which is at least 25% of your natural gas needs) for July. It is now February 15thand the cash (spot) price for natural gas is $3.00 per mmbtu. The July futures contract for natural gas is $2.90 per mmbtu. Use the July contract to hedge. Go long or short the required number of futures contracts. On July 15th, you close out the futures position at $3.47 per mmbtu (i.e., the futures price to offset your position) and purchase the natural gas in the spot market. Natural gas cash prices are $3.32 per mmbtu on July 15th.

Answer 48

A. $0.10; B. $-0.15; C. BENEFIT