Question
6. Suppose a one year oil forward price is $60 per barrel. Suppose further that there are two equally likely outcomes in one year---an oil
6. Suppose a one year oil forward price is $60 per barrel. Suppose further that there are two equally likely outcomes in one year---an oil spot price of $40 and an oil price of $80. If the oil price is $40, the firms revenue will be $150 million with 75% probability and $200 million with 25% probability. If the oil price is $80, the firms revenue will be $200 million with 50% probability and $250 million with 50% probability. What position in oil forward contracts minimizes the variance of the firms revenue (with the underlying asset being a barrel of oil)?
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