Suppose six months from now (i.e. in November), GNPC, an oil exploration company, expects to produce 100,000 barrels of crude oil. The current price of oil is $40 per barrel and the futures price for November delivery is $45 per barrel. The contract size is 1,000 barrels per contract. Illustrate how GNPC can use the futures market to manage its oil price risk. In your answer please indicate the position to be taken in the futures market and the number of contracts required.

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Question Production Capacity 100000 barrels Contract Size 1000 barrels Therefore ... View the full answer