Suppose that your company is planning to sell 1.25 million litres of fuel in two years. The current price of fuel is £1.60 per litre. a) Suppose there is a two-year heating oil futures contract available. The futures price is £1.63 per litre. How many contracts would you need to fully eliminate your risk exposure over the next two years? How many contracts would you need if your optimal hedging ratio was 0.75? What position in these contracts would you take today? Explain. b) Evaluate the outcomes of your hedging strategy if the price of fuel in two years is (1) £1.72 per litre, and (2) £1.58 per litre. In each case assume the heating oil futures price to be equal to that of the fuel. Comment on your results.
Suppose that your company is planning to sell 1.25 million litres of fuel in two years. The current price of fuel is £1.60 per litre. a) Suppose there is a two-year heating oil futures contract available. The futures price is £1.63 per litre. How many contracts would you need to fully eliminate your risk exposure over the next two years? How many contracts would you need if your optimal hedging ratio was 0.75? What position in these contracts would you take today? Explain. b) Evaluate the outcomes of your hedging strategy if the price of fuel in two years is (1) £1.72 per litre, and (2) £1.58 per litre. In each case assume the heating oil futures price to be equal to that of the fuel. Comment on your results.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Suppose that your company is planning to sell 1.25 million litres of fuel in two years. The
current price of fuel is £1.60 per litre.
a) Suppose there is a two-year heating oil futures contract available. The futures
price is £1.63 per litre. How many contracts would you need to fully eliminate your
risk exposure over the next two years? How many contracts would you need if
your optimal hedging ratio was 0.75? What position in these contracts would you
take today? Explain.
b) Evaluate the outcomes of your hedging strategy if the price of fuel in two years is
(1) £1.72 per litre, and (2) £1.58 per litre. In each case assume the heating oil
futures price to be equal to that of the fuel. Comment on your results.
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