GASOILEAST CASE Questions -

GASOILEAST is an international trading company, mainly active in the GASOIL market. They would like to play the price differential between the US market (in over capacity) and the Japanese market where the very strong demand pushes the prices up.

On the 4th of January, when the Gasoil market is at 154.00 cts/gal in NY, GASOILEAST can conclude two deals at the same time.

CONTRACT 1

Selling 200 000 bbl of Gasoil to Marubeni at a fixed price of 68$/bbl

CONTRACT 2

Buying 200 000 bbl of gasoil at a floating price from Exxon:

Formula:

• Mean of Platt's HEATING OIL N°2 NEW YORK FOB BARGES - 2 cts/Gal
• Pricing: 5 quotations around the Bill of Lading (BL(+2,-2)).

The BL is planned at the end of the month and the freight cost is 2 $/bbl.

Question 1 -

a) Which profit can the trading company hope for, with this trading strategy?

b) How do you analyze the price risk resulting from this trading operation? Try to quantify the risk with your market experience and by considering that the gasoil market volatility is around 30% in average.

c) Knowing the forward market prices, is the benefit calculated in a) still valid? Which profit can you hope for if you consider that the futures prices move toward the spot price?

Question 2 -

a) The BL should be scheduled for the 31st of January. Which hedging strategy should GASOILEAST put in place to protect itself? Specify the market, the contracts, the quantity, the timing and the price.

(We consider that the futures transactions always get traded at the closure price (cf annexe 1) without any liquidity problem and with no extra cost).

b) How do you manage your hedge during the pricing period?

c) Calculate the final result of this trading transaction.

Question 3 -

Instead of selling to Marubeni at fixed price, the sale happens on a floating price basis; the buying with Exxon stays the same.

CONTRACT 1 bis :

Selling 200 000 bbl of Gas0il to MARUBENI at a floating price:

Formula: Mean of Platt's GASOIL REGULAR SINGAPORE + 0,5 $/bbl.

Pricing: 5 quotations around the delivery date (delivery date (+2, -2)).

Planned Delivery Date: 21st February

a) What are the consequences for the risk profile ...

b) Which hedging strategies can be put in place by only using Nymex Heating Oil futures contract?

c) Calculate the final result

d) Is this hedging strategy efficient? If no, why?

Question 4 -

a) The Singapore swaps market trades on monthly basis (monthly settlement). Knowing that, on the 4th of January, the Gasoil Regular Singapore swap was trading 67.85 $/bbl for 19-23 February week, what should the GASOILEAST trader have done?

b) How do you calculate the final result?

Question 5 -

We go back to the first scenario where we sell fixed price to Marubeni. As we do not live in a perfect world, the cargo we have charted from NY to Singapore has been delayed. On Jan 31st, the captain is informing you that he will only be arriving at load port on Feb 3rd.

a) What are the consequences of this delay for your hedging strategy?

b) The BL is now planned on Feb 6th, what would you do with your initial hedging strategy?

Question 6 -

As the cargo is no longer arriving on the contractual delivery date but on Feb"28th, Marubeni is asking for a price reduction of 2$/bbl to keep the contract. They call on Feb 7th. In the meantime, a broker informs GASOILEAST he can sell its cargo, which has just loaded from NY, at a price of ICE Gasoil March + 5$/MT, to BP.

The shipbroker can grant GASOILEAST the option to go to Europe for 1.5 $/bbl (vs 2 $/bbl for Singapore).

Who is GASOILEAST going to sell its physical to?

Attachment:- Assignment File.rar