Question: 2. Question 2 [Total: 20 marks] It is January and a company has to purchase 30,000 barrels of oil in May. The company enters into

2. Question 2

[Total: 20 marks]

It is January and a company has to purchase 30,000 barrels of oil in May. The company enters into a long futures agreement for delivery of oil in June. The futures price for June delivery is $25 per barrel of oil. When the company closes out the futures position in May, the spot price of oil is $30 per barrel and the futures price is $29 per barrel.

a) Please calculate the effective price per barrel of oil and the total effective price to pay in May. [5 marks]

b) Please compute the size of the basis.

[5 marks]

c) Please explain why a long hedgers position worsens if the basis strengthens unexpectedly and improves when the basis weakens unexpectedly.

[10 marks]

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