4. (Future) It is at May 1st now, a company expect to sell a one million barrels of oil on Oct. 1st. The current spot price for oil is 20$/barrel. The company decides to hedge its position by trading on future market. Each contract is on 1000 barrels of oil. The following yield curve holds throughout the whole year. Answering the following questions. (15%) Period Annual (years) Rate 1/12 0.03 0.25 0.04 0.5 0.05 0.75 0.055 1 0.06 1) Two future contracts are available for the company to use now. One is the 6-month contact that is going to expire on Nov. 1st. The other is the 3-month contract that is going to expire on Aug.1st. Which contract should the firm use for hedging? Why? What position should the firm take, short or long? How many contracts should be held? (3%) 2) Using the yield curve given above and following your answer in 1), compute the the future price in the contract. (4%) 3) 3 months later (Aug. 1st), the current spot price of oil is 18$/barrel, what is the value of the contract you hold in question 1)? using the same yield curve. (4%) 4) On Oct. 1st, the spot price of oil is 16$. The company sells 1million barrels of oil as planed and closes its position in future market at the same time. Assuming the same yield curve holds, what is the total payoff from both two markets? (4%) F = S, (1 + r) 4. (Future) It is at May 1st now, a company expect to sell a one million barrels of oil on Oct. 1st. The current spot price for oil is 20$/barrel. The company decides to hedge its position by trading on future market. Each contract is on 1000 barrels of oil. The following yield curve holds throughout the whole year. Answering the following questions. (15%) Period Annual (years) Rate 1/12 0.03 0.25 0.04 0.5 0.05 0.75 0.055 1 0.06 1) Two future contracts are available for the company to use now. One is the 6-month contact that is going to expire on Nov. 1st. The other is the 3-month contract that is going to expire on Aug.1st. Which contract should the firm use for hedging? Why? What position should the firm take, short or long? How many contracts should be held? (3%) 2) Using the yield curve given above and following your answer in 1), compute the the future price in the contract. (4%) 3) 3 months later (Aug. 1st), the current spot price of oil is 18$/barrel, what is the value of the contract you hold in question 1)? using the same yield curve. (4%) 4) On Oct. 1st, the spot price of oil is 16$. The company sells 1million barrels of oil as planed and closes its position in future market at the same time. Assuming the same yield curve holds, what is the total payoff from both two markets? (4%) F = S, (1 + r)
