You hold 1 million barrels of oil at a current price of S0 = $25 per barrel. The current quoted futures price for delivery of oil in about 1 years' time is F = $26.25 per barrel. You want to hedge your spot oil position by using futures. The spot price of oil in 11½ months' time is S1 = $20 per barrel and the futures price (for delivery in 2 weeks) is F1 = 20.042 ($ per barrel). 

How do you hedge and what is the effective value of your hedged position in 11½ months' time?

Answer rating: 100% (QA)

To hedge the spot oil position you need to sell 1year futures contracts on oil The number of futures ... View the full answer