An oil refiner purchases crude oil, which it then refines (i.e. processes) into finished products like gasoline and diesel. Does the refiner have a long or short exposure to crude oil.

An oil refiner purchases crude oil, which it then refines (i.e. processes) into finished products like gasoline and diesel. Does the refiner have a long or short exposure to crude oil? How about gasoline (i.e. long or short exposure)? What hedging positions would the refiner take with respect to crude oil and gasoline if it wants to increase the certainty of its cash flows? 

CanTruck, a Canadian truck manufacturer, will be delivering a large shipment to a French firm in 1 year. CanTruck expects to receive a payment of 10 million Euros at that time. Currently the spot rate is $1.50 (CDN/€) and the 1-year forward rate is $1.60 (CDN/€). 

a.What risks does CanTruck face with the sale of the fleet of trucks? 

b.Describe how CanTruck can hedge the currency risk. 

c.Describe CanTruck's profit or loss on the hedge if the actual spot rate in 1 year is: 

   I. $1.40 per Euro

   II. $1.80 per Euro 

D. Given your answers to (a) and (b), should CanTruck hedge?  

Answer rating: 100% (QA)

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