Hedging Strategy For Commodity Risk (J&L Railroad (UVA-F-1053)) Study Questions

Hedging Strategy for Commodity Risk (J&L Railroad (UVA-F-1053)) Study Questions:

1. Should J&L hedge all of its exposure to diesel fuel for the ensuing year? What percentage of the 210 million gallons would you hedge?

2. What are the pros and cons of using NYMEX contracts versus using the risk-management products offered by KCNB? Is the use of a monthly average price a net advantage or disadvantage to J&L? What about the bank?

3. Using the estimate of 17.5 million gallons per month, how would you construct a futures hedge for the next 12 months? How would you construct a commodity-swap hedge?

4. Should Matthews use a cap as a hedge? What strike price for the cap would you recommend she choose?

5. If Matthews wants to minimize the cost of hedging, should she use a collar? What cap and floor strike prices would you recommend using?