Exercise 4B

An oil miner has contracted to supply 50k barrels of Brent crude oil on 15th October 2018. The miner uses the November 2018 Brent crude futures contracts to hedge its risk. Each contract provides 1000 barrels.

The standard deviation of monthly changes in the futures price of Brent crude is $2.50 per barrel. The standard deviation of monthly changes in the spot price of Brent crude is $2 per barrel. The correlation between the futures price changes and the spot price changes is 1.1. it is now 15th September 2018.

Provide the futures hedge strategy for the miner. Is a perfect hedge possible?