You are a crude oil dealer. You intend to buy 50,000 barrels of crude oil in December 2021. Each contract calls for delivery of 1,000 barrels of oil. Current futures price of one barrel of crude oil is $70. You believe that there are only five possible oil prices in December which are $50, $60, $70, $80 and $90. Explain what action you would take to protect from changes in oil prices in December. Provide reasons for your action. Calculate the total cost for each of the possible price in December.

You are a crude oil dealer. You intend to buy 50,000 barrels of crude oil in December 2021. Each contract calls for delivery of 1,000 barrels of oil. Current futures price of one barrel of crude oil is $70. You believe that there are only five possible oil prices in December which are $50, $60, $70, $80 and $90. Explain what action you would take to protect from changes in oil prices in December. Provide reasons for your action. Calculate the total cost for each of the possible price in December.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 2P

See similar textbooks

Similar questions

You are a crude oil dealer. You intend to sell 40,000 barrels of crude oil in December. Each contract calls for delivery of 1,000 barrels of oil. Current futures price of one barrel of crude oil is $70. You believe that there are only four possible oil prices in December which are $50, $60, $70, and $80. i. Explain what action you would take to protect from changes in oil prices in December. Provide reasons for your action. ii. Calculate the total proceeds for each of the possible prices in December
You are the buyer for a cereal company and you must buy 80,000 bushels of corn next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 415′0 cents per bushel for delivery next month. If you want to hedge your cost, you should _____ contracts at a cost of _____ per contract.
Assume that the price of December 2021 corn futures is $4.65/bushel in February and $4.50 in October. If spot cash price in October is $4.55, what is the farmer's total revenue? Assume he entered into 20 contracts. Each corn contract is 5000 bushels.
Suppose that it is january 15 now. A copper fabricator knows it will require 100,000 pounds of copper on May 15 to meet a certain contract. So he takes a long position in the future contract. At that time the spot price of copper is 140 cents per pound and the May futures price is 120 cents per pound. Each contract is for the delivery of 25,000 pounds of copper. If the cost of copper on May 15 is 125 cents per pound, what is the effective price this copper fabricator pays per pound? a. Around 125 cents b. Around 105 cents c. Around 140 cents d. Around 120 cents e. Around 115 cents
It is now June. A company knows that it will sell 5,000 barrels of crude oil in September. It uses the October CME Group futures contract to hedge the price it will receive. Each contract is on 1,000 barrels of “light sweet crude.” What position should it take? What price risks is it still exposed to after taking the position?
A trader bought two July futures contracts. Each contract is for the delivery of 1,000 barrels. The initial margin is $11,250 per contract and the maintenance margin is $9,000. Calculate the daily gain and loss and margin account balance from April 13, 2020 to April 15, 2020 and explain when the investor will receive a margin call and how much does he need to top up?
You are a futures trader on Lean Hog at Kantar, New York. You have the following information on Lean Hog. The standard deviation of monthly changes in the spot price of Lean Hog Futures is (in cents per pound) 5. The standard deviation of monthly changes in the futures price of Lean Hog Futures the closest contract is 8. The correlation between the futures price changes and the spot price changes is 0.8. It is now December 17, 2019. Your client, a pork producer, is committed to purchasing 400,000 pounds of lean hog on January 15. The producer wants to use February Lean Hog futures contracts to hedge its risk. Each contract is for the delivery of 40,000 pounds of cattle. a. What is the optimal hedge ratio? (sample answer: 0.45 or 45%) b. Should the pork producer take a long or short hedge? (sample answer: short or long) c. How many contracts of lean hog futures does your client need to take to hedge the risk? (sample answer: 6 contracts)
XYZ flour company is planning to buy wheat for the next year’s production. 10,000 bushels of wheat will be purchased each quarter, on the 15th of January, April, July, and October in 2022. It wants to lock the wheat price using a futures contract, and at the same time use a swap to prepare the expenditure. The spot price of wheat today (April 15, 2021) is $3.1 per bushel, and the company enters futures contracts today. The prevailing interest rate is 1.5%, compounded continuously. Recall that each futures contract is for 5000 bushels and assume no storage cost of wheat. (a) If the company uses a prepaid swap, what is the prepayment? (b) If the company uses a plain vanilla swap for the quarterly purchase next year, what is the fixed amount?
Let’s assume we are a heating oil delivery service company that sells 80,000 gallons of heating oil every month its clients. The firm wants to hedge its position buy entering into a contract to buy its heating oil at the end of each month for the following month. The firm has decided it only needs to hedge for the next 5 months as the demand for heating oil significantly falls off after that. What would be the swap price of the 80,000 gallons of heating oil at the end of each month for the next 5-months if the following information is true? (Risk-free rate is provided per annum with continuous compounding) Month Forward Price Risk-Free Rate 1 $ 2.999 1.50% 2 $ 3.009 1.50% 3 $ 3.039 1.60% 4 $ 3.075 1.75% 5 $ 3.105 1.75%
(1) A trader signs a Forward contract on April 30 for the delivery of 500 gallons of oil on October 31. The risk-free rate is 5.00% on April 30 and the current price of oil is $30 per gallon. Each gallon of storage costs $0.03 per day.a. What will be the fair forward price on April 30?b. If the spot price of oil is $45 per gallon on July 31, what profit or loss would the trader incur if they close out (cash settle) their position?
During 2019, R Corp., a manufacturer of chocolate candies, contracted to purchase 100,000 pounds of cocoa beans at 1.00 per pound, delivery to be made in the spring of 2020. Because a record harvest is predicted for 2020, the price per pound for cocoa beans had fallen to 0.80 by December 31, 2019. Of the following journal entries, the one that would properly reflect in 2019 the effect of the commitment of R Corp. to purchase the 100,000 pounds of cocoa is:
as a soybean buyer, you are concerned about soy prices. Currently, they are at $60 per bushel .Therefore, you enter into the appropriate futures contract at the current spot price. What is your profit or loss, if six months later, soybean is selling at the spot market for 51 bushell? why?