3. Suppose you are a derivatives trader specializing in creating customized commodity for- ward contracts for clients and then hedging your position with exchange-traded futures contracts. Your latest position is an agreement to deliver 100,000 gallons of unleaded gas- oline to a client in three months. a. Explain how you can hedge your position using gasoline futures contracts. b. If the only available gasoline futures contracts call for the delivery of 42,000 gallons and mature in either two or four months, describe the nature of the basis risk involved in your hedge.
3. Suppose you are a derivatives trader specializing in creating customized commodity for- ward contracts for clients and then hedging your position with exchange-traded futures contracts. Your latest position is an agreement to deliver 100,000 gallons of unleaded gas- oline to a client in three months. a. Explain how you can hedge your position using gasoline futures contracts. b. If the only available gasoline futures contracts call for the delivery of 42,000 gallons and mature in either two or four months, describe the nature of the basis risk involved in your hedge.
Chapter5: Currency Derivatives
Section: Chapter Questions
Problem 3BIC
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Transcribed Image Text:3. Suppose you are a derivatives trader specializing in creating customized commodity for-
ward contracts for clients and then hedging your position with exchange-traded futures
contracts. Your latest position is an agreement to deliver 100,000 gallons of unleaded gas-
oline to a client in three months.
a. Explain how you can hedge your position using gasoline futures contracts.
b. If the only available gasoline futures contracts call for the delivery of 42,000 gallons
and mature in either two or four months, describe the nature of the basis risk involved
in your hedge.
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