Suppose in 6 months' time the cost of a gallon of heating oil will eitherbe $0.90 or$1.10. The current price is $1 per gallon.

What are the risks faced by a re-seller of heating oil that has a large inventory at hand?
What are the risks facedby a user of heatingoil with a small inventoryat hand?
How can these two parties use the heating oil futures market to reduce theirrisks and lock in a price of $1 per gallon? Assume that each contract is for 50,000 gallons and they each need to hedge 100,000 gallons.

Can you say that each party has been made better off? Why or why not?

Answer rating: 100% (QA)

Risks faced by a reseller of heating oil with a large inventory a Price Risk If the cost of a gallon of heating oil decreases to 090 the reseller woul... View the full answer