We will use Example 3.1 to provide a more detailed illustration of the operation of a short hedge. It is May 15 today and an oil producer has just negotiated a contract to sell 1 million barrels of crude oil. It has been agreed that the price that will apply in the contract is the market price on August 15. The oil producer is therefore in the position where it will gain $10,000 for each 1 cent increase in the price of oil over the next three months and lose $10,000 for each 1 cent decrease in the price during this period. The spot price on May 15 is $60 per barrel and the crude oil futures price for August delivery for the CME Group contract is $59 per barrel. Because each futures contract traded by the CME Group is for the delivery of 1,000 barrels, the company can hedge its exposure by shorting 1,000 futures contracts. If the oil producer closes out its position on August 15, the effect of the strategy should be to lock in a price close to $59 per barrel. To illustrate what might happen, suppose that the spot price on August 15 proves to be $55 per barrel. The company realizes $55 million for the oil under its sales contract. Because August is the delivery month for the futures contract, the futures price on August 15 should be very close to the spot price of $55 on that date. The company therefore gains approximately

$59 $55 = $4

Illustrate this with a short table and graph.