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Consider a firm plans to buy 30,000 barrels of oil in January of 2009. Let the possible oil price per barrel in January 2009
Consider a firm plans to buy 30,000 barrels of oil in January of 2009. Let the possible oil price per barrel in January 2009 are $63.58, $65.58, and $67.58. To hedge against possible price fluctuation in oil prices, the firm is considering investing in oil futures contract. The oil futures price for contracts maturing in January 2009 is $65.58 per barrel. A. Compute the number of futures contract the firm needs to consider, if each contract calls for a delivery of 1000 barrels. State whether the firm needs to sell or buy futures contract to hedge against possible price fluctuations. B. Show that the net cost of the firm to purchase 30,000 barrels of oil remains same for different oil prices in January after taking the hedged position. What will be the total cost to purchase 30,000 barrels of oil after taking the hedged position with futures contract? Problem Consider a firm plans to buy 20,000 barrels of oil in May of 2008. Let the possible oil price per barrel in May are 42.55, 44.55, and 46.55. To hedge against possible price fluctuation in oil prices, the firm is considering investing in oil futures contract. The oil futures price is 44.55 in May. A. Compute the number of futures contract the firm needs to consider, if each contract calls for a delivery of 1000 barrels. State whether the firm needs to sell or buy futures contract to hedge against possible price fluctuations. B. Show that the net cost of the firm to purchase 20,000 barrels of oil remains same for different oil prices in May after taking the hedged position. What will be the total cost to purchase 20,000 barrels of oil after taking the hedged position with futures contract?
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