Question

In: Finance

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 1 year ago
Next > < Previous

Related Solutions

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. Explain how he can hedge against...
An oil producer plans to sell 1 million barrels of crude oil one year from now....
An oil producer plans to sell 1 million barrels of crude oil one year from now. The oil price in one year is normally distributed with the mean of $80 per barrel and the standard deviation of $12 per barrel. What is the probability that the sales revenue is lower than $50 millions A)0.62% B)41.75% C)58.25% D)99.38%
You own 15 barrels of oil that you can sell this year or next year and...
You own 15 barrels of oil that you can sell this year or next year and is otherwise worthless. The price of abarrelofoilineachyearisp0 =21−1q0 andp0 =17−1q1 withadiscountfactorof.95andacostof 1 dollars per barrel. Find the optimal extraction plan, the prices in each period and total discounted net revenue. You own 15 barrels of oil that you can sell this year, next year, or the year after next year and is otherwise worthless. The price of a barrel of oil in each year...
chandler Oil has 5000 barrels of crude oil 1 and 10,000 barrels of crude oil 2...
chandler Oil has 5000 barrels of crude oil 1 and 10,000 barrels of crude oil 2 available. Chandler sells gasoline and heating oil. These products are produced by blending the two crude oils together. Each barrel of crude oil 1 has a quality level of 10 and each barrel of crude oil 2 has a quality level of 5.6 Gasoline must have an average quality level of at least 8, whereas heating oil must have an average quality level of...
Assume that you invest in oil, and you plan to sell 350,000 oil barrels in Dec...
Assume that you invest in oil, and you plan to sell 350,000 oil barrels in Dec 2020. You think that the price of oil in Dec would be in the range of $50 – $55 per barrel. Show how would you use the futures contract to hedge against oil revenue loss (assume each futures contract calls for the delivery of 1,000 oil barrels and the current futures price is $52.5 per barrel) or against a future price reduction (hint: develop...
Assume that you invest in oil, and you plan to sell 350,000 oil barrels in Dec...
Assume that you invest in oil, and you plan to sell 350,000 oil barrels in Dec 2020. You think that the price of oil in Dec would be in the range of $50 – $55 per barrel. Show how would you use the futures contract to hedge against oil revenue loss (assume each futures contract calls for the delivery of 1,000 oil barrels and the current futures price is $52.5 per barrel) or against a future price reduction (hint: develop...
Question 6 Mogul oil company will sell 7000 barrels of oil in 3 months. Suppose Mogul...
Question 6 Mogul oil company will sell 7000 barrels of oil in 3 months. Suppose Mogul hedges the risk by selling futures on 7000 barrels of oil. The current oil futures price is $15.6 dollars per barrel. If in 3 months the spot price of oil is $15.0 and the futures price is $15.9 per barrel, what is Mogul's effective price of oil per barrel? 16.5 17.0 14.7 15.3 Question 7 Mogul oil company will sell 9000 barrels of oil...
Six months ago you entered a forward contract for delivery of 100M barrels of crude oil....
Six months ago you entered a forward contract for delivery of 100M barrels of crude oil. Under the term of the contract you will receive $70 per barrel at delivery 2 years from now. Today, the spot price of the same grade of crude oil is $76. Assuming that the risk free rate is 3% per year, what is the value of the forward? Assume a zero storage cost and a zero convenience yield. $-1.57 per barrel $-10.08 per barrel...
On December 15, 2018, a US company imported 400,000 barrels of oil from a country in...
On December 15, 2018, a US company imported 400,000 barrels of oil from a country in the Europe. The US company agreed to pay 40,000,000 euros on February 15, 2019. To reduce the risk of loss due to exchange rates, the company entered into a forward contract to buy 40,000,000 euros on February 15 at the forward rate of $.0269. Direct exchange rates on various dates were:                                          Spot Rate          Forward Rate 2/15 Delivery December 15, 2018        $.0239 $.0269...
Assume the US can produce 30 barrels of oil or 15 tons of wheat, while Canada...
Assume the US can produce 30 barrels of oil or 15 tons of wheat, while Canada can produce 50 barrels of oil OR 20 tons of wheat. What is the opporunity cost ratios (oil to wheat)for each country? If Canada and the US are trading, who will be exporting Oil? What can the importing nation do to encourage oil production (if it chooses)?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT