Hedging gas at a regional hub with Henry Hub futures
Asked at DRW
A utility will buy natural gas next month at a regional delivery point. The liquid futures contract settles at a different benchmark location (Henry Hub). The utility buys Henry Hub futures against its future purchase.
Has it locked in its cost? If not, what risk remains, and how should it think about hedge size?
Show a hint
The regional price equals the benchmark price plus a location gap. Which of those does the futures contract actually track?
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.