Morrison Oil and Gas Comp

Morrison Oil and Gas Comp

Morrison Oil and Gas Company?s chief ?nancial analyst is Samuel (Sam) Crawford.Sam completed hisanalysis,suggesting that the investment is indeed a good one for the company,andpresented it to the ?rm?s executive committee.The executive committee consists of the ?rm?s CEO,CFO,and COO.The CFO thought Sam?s analysis was on target,butthe COO and CEO were concerned about the fact that the hedging strategy would notwork for the investment.In fact,they wondered why hedging the investment is such agood idea.Sam thought for a second or two before responding and decided how tobest explain why the project is a good one and involves hedging the investment cash?ows using one-year call options on natural gas.These call options,which have a$13.90-per-MCF strike price,are selling for $1.86 per MCF.Show how selling calloptions on 50 MCF of gas today and undertaking the investment provides Morrisonwith a hedged (i.e.,risk-free) investment.

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