Question

1. You are setting up a relative trade between WTI and Brent using futures contracts.  Your point of view (POV) is that over the next week, Brent prices will increase less than WTI prices.  How could you set up a trade using futures contracts to profit from your POV? (don’t worry about the # of contracts, just which would be long or short)

2. You are setting up a timing trade using RBOB futures contracts.  Your point of view is that over the next week, March 2021 RBOB prices will increase more than June 2021 RBOB prices.  How could you set up a trade using futures contracts to profit from your POV?

3. You are an oil producer in Oklahoma.  You anticipate that on October 20, 2020 you will have 500,000 barrels of crude oil to sell.  If you wanted to completely hedge your price risk and lock in a price today, how could you use a futures contract to hedge your risk?  
   1. Name a specific date and commodity contract that is traded on the CME that would make the most sense for this hedge.
   2. How you would use it (i.e. go long or short)?
   3. How many contracts you would purchase?

Answer 1

The two basic positions in stock futures is long and short, where the long position agrees to buy the stock for a certain price at a certain future date i.e when the contract expires and the short position agrees to sell the stock for a certain price at a certain date i.e when the contract expires. If, you think that the price of the stock will be higher in a week than it is today, then you can go long and if you think that the price of the stock will be lower in the next week ,you can go short. so, here it is WTI which price increases more than Brent. so, it is better to go long for WTI and short for Brent.

Since it is anticipated that, over the next week , March 2021 RBOB prices will increase more than June 2021 RBOB prices, it is better to go long for march 2021 RBOB and short for June 2021 RBOB.

In order to completely hedge the price risk of crude oil through future contracts, we have to check for the availability of future contract of one barrel at a minimum price (that includes all the costs incurred for production along with estimated profits) of oil which expires on october 20, 2020 and we can sell (short position) this futures contract to gain the required protection or locking in the sale price. since the unit for crude oil is 1000 barrels per contrct, it is 500 (500000 barrels divided by 1000 barrels per unit)  future contracts to short position which expires on October 20, 2020 has to be taken.