William Hughes is an owner of one of the cargo trucking companies in the United Kingdom called Tryciau Nerthol Ltd. One day, William watches breaking news on TV and finds out that there has been an ISIS insurgency in Iraq and rebels managed to take control of a significant number of the oil wells. William jumps up on the sofa, as this news is going to have an impact on his business: around 40% of his business costs are purchases of diesel and the price is very likely to go up. He springs into action. He calls his dealer and buys 1000 3-month London gas oil futures. His business is not allowed to use a favourably taxed red diesel (traditionally called ‘gas oil’), but other diesel futures are not traded in London.Questions: Why did William buy futures for diesel which he cannot use in his business? Critically examine the concept of an imperfect hedge. Critically evaluate the timing of his action – is the time he hears the news a good time to attempt the hedge? Propose a long-term hedging strategy.
William Hughes is an owner of one of the cargo trucking companies in the United Kingdom called Tryciau Nerthol Ltd. One day, William watches breaking news on TV and finds out that there has been an ISIS insurgency in Iraq and rebels managed to take control of a significant number of the oil wells. William jumps up on the sofa, as this news is going to have an impact on his business: around 40% of his business costs are purchases of diesel and the price is very likely to go up. He springs into action. He calls his dealer and buys 1000 3-month London gas oil futures. His business is not allowed to use a favourably taxed red diesel (traditionally called ‘gas oil’), but other diesel futures are not traded in London.Questions: Why did William buy futures for diesel which he cannot use in his business? Critically examine the concept of an imperfect hedge. Critically evaluate the timing of his action – is the time he hears the news a good time to attempt the hedge? Propose a long-term hedging strategy.
SWFT Essntl Tax Individ/Bus Entities 2020
23rd Edition
ISBN:9780357391266
Author:Nellen
Publisher:Nellen
Chapter11: Individuals As Employees And Proprietors
Section: Chapter Questions
Problem 29P
Related questions
Question
William Hughes is an owner of one of the cargo trucking companies in the United Kingdom called Tryciau Nerthol Ltd. One day, William watches breaking news on TV and finds out that there has been an ISIS insurgency in Iraq and rebels managed to take control of a significant number of the oil wells. William jumps up on the sofa, as this news is going to have an impact on his business: around 40% of his business costs are purchases of diesel and the price is very likely to go up.
He springs into action. He calls his dealer and buys 1000 3-month London gas oil futures. His business is not allowed to use a favourably taxed red diesel (traditionally called ‘gas oil’), but other diesel futures are not traded in London.Questions:
- Why did William buy futures for diesel which he cannot use in his business? Critically examine the concept of an imperfect hedge.
- Critically evaluate the timing of his action – is the time he hears the news a good time to attempt the hedge?
- Propose a long-term hedging strategy.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Business Its Legal Ethical & Global Environment
Accounting
ISBN:
9781305224414
Author:
JENNINGS
Publisher:
Cengage
Business Its Legal Ethical & Global Environment
Accounting
ISBN:
9781305224414
Author:
JENNINGS
Publisher:
Cengage
Auditing: A Risk Based-Approach to Conducting a Q…
Accounting
ISBN:
9781305080577
Author:
Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:
South-Western College Pub