General Motors has an obligation to deliver 2 million barrels of oil in six months at a fixed price of $25 per barrel. European options exist to buy oil in six months at $28 per barrel. Assume the six-month annualized (continuously compounded)

riskless rate is 5 percent. Because of recent unrest in the Middle East, however, the volatility (that is, standard deviation) of the annualized percentage change in the price of oil has soared to an incredible 59.44 percent (annualized).

Can General Motors eliminate its exposure to oil price risk generated by the delivery agreement using options, and if so, how many options will it have to buy or sell in order to do this? (Hint: The Black-Scholes option pricing equation is valid here.)

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