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Answer both the following with regards to basis risk: On 10 th October the spot price of crude is $90 and the December futures crude
- Answer both the following with regards to basis risk:
- On 10th October the spot price of crude is $90 and the December futures crude is $85. A company enters into a long December futures contract on October 10th to hedge a purchase of oil. The company closes out (settles by offset) its position and transacts in the spot market on October 16 when the Spot price is $82 and the December futures price is $84. The companys effective price paid per barrel of crude on October 16 is ______.
- Say you are running a long crude-oil ETF that goes long nearby crude futures contracts. What dangers or opportunities regarding basis risk should your clients be made aware of? Illustrate using an example where crude is in perpetual strong backwardation. Illustrate using an example where crude is in perpetual contango.
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