As a financial analyst at Deutsche Bank, you are analyzing how futures will be used to reduce the risk for your client. It is March 31. Your client knows that it will need to purchase 30,000 barrels of crude oil sometime in June. Your client decides to use July oil futures for hedging. The current July futures price is $27. One oil futures contract controls 1,000 barrels of oil.

 On June 11, the spot oil price is $28 per barrel and the company decides to take oil position and July futures price is $29. It therefore closes out its futures contract on that date.

a. Should the company take a long position or short position in Futures contracts for hedging purpose?

b. What will be the total cost of oil if the company use July oil futures for hedging? 

c. What will be the net cost of oil per barrel if the company use July oil futures for hedging?  Suppose that the company decides to use a hedge ratio of 0.6, please answer the following questions:

 What will be the total cost of oil if the company use July oil futures for hedging?

 What will be the net cost of oil per barrel if the company use July oil futures for hedging? 

Answer rating: 100% (QA)

a To hedge the risk of needing to purchase 30000 barrels of crude oil in June the company should tak... View the full answer