Question
Alberta Utility needs to power its generators with oil and is afraid the price of oil will continue to recover from the present spot price
Alberta Utility needs to power its generators with oil and is afraid the price of oil will continue to recover from the present spot price of $38.00 after dropping to a low of $28.00. Its needs are for 98,000 barrels. Contract size is 1,000 barrels per contract. Simultaneously, Prairie Sky is looking to hedge part of it production and enters into a forward contract. Both parties are willing to deal in November futures with a forward price of $48.00 per barrel. Set up the hedge and show the profit and loss if the spot oil prices in the future, trade at $50 per barrel.
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