A petrochemical firm will purchase 100,000 barrels of oil in 4 months, and is concerned about the uncertainty in the price it will have to pay. It doesn't want to hedge its exposure using oil futures contracts, because it believes oil prices could fall, and it wants to benefit if there is a decrease in oil prices. But the firm's competitive position will be severely weakened if oil prices happen to rise. Please show how the firm can use a call option on oil to provide protection against the impact of oil price increases, while preserving the ability to benefit from price decreases.

 Specifically, what is firm's position in a call option with strike price $30? Please explain?

What is the firm's net expenditures per barrel of oil after it uses the call option?

Answer rating: 100% (QA)

To protect against the impact of oil price increases while preserving the ability to benefit from pr... View the full answer