Firm MG is a marketing company. It does not produce crude oil thus rather, it buys the crude in order to sell it to it's customers. MG had has several direct contracts with several clients to sell the clients crude oil for the fixed price of $85.50/barrel on the 15th trading day of January of every year for the next 5 years. Actually, every JAN MG total sale to its clients will be 200,000 barrels.

A. Are the contracts of MG with its clients forwards or futures contracts? Explain.

B. MG decided to hedge these contracts with WTI (West Texas Intermediate) futures contracts on NYMEX.

Explain why MG need the hedge, as well as what type of a hedge LONG or SHORT?

Answer rating: 100% (QA)

A The contracts of Firm MG with its clients are futures contracts This is because the contracts ... View the full answer