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It is May 15. An oil producer has negotiated a contract to sell 100,000 barrels of...

It is May 15. An oil producer has negotiated a contract to sell 100,000 barrels of crude oil. The price in the contract is the spot price on August 15. The spot price on May 15 is $60 per barrel and the crude oil futures price for August delivery on the New York Mercantile Exchange (NYMEX) is $59 per barrel. Note that each futures contract on NYMEX is for the delivery of 1,000 barrels.

A. Explain how he can hedge against the oil price fluctuations?

B. Suppose that the spot price on August 15 proves to be is either $69 or $45 per barrel. Discuss about the effect of your hedging strategy at this spot price on August 15.

Solutions

Expert Solution

Dear Reader

The question is testing the interpretation of futures and hedging. Please read concept given in solution and then calculation.

Hope you will understand solution.

Happy Reading ✌️

Stay Safe!

jeff jeffy answered 2 years ago
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