Question
A commodity producer, Company Trio plc. expects to produce 10,000 barrels of crude oil in six months and plans to sell them in the spot
A commodity producer, Company Trio plc. expects to produce 10,000 barrels of crude oil in six months and plans to sell them in the spot market. The current market price for crude oil is $70 per barrel. Trio is concerned about the potential decline in oil prices and wants to hedge its production. Each futures contract represents 1,000 barrels of oil.
(1) If the six-month crude oil futures contract is priced at $68 per barrel, what should Trio do to fully hedge its position? Explain your strategy.
(2) If the oil price falls to $60 over the six months, whats the position of Trio if it has successfully hedged against the risk?
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