financial markets and instruments

1. Petrochemical Parfum (PP), which counts heavy fuel oil as one of its major inputs, is concerned about the possibility of an increase in the price of the heavy oil. (i) Discuss the several ways in which PP can protect itself against an increase in the price of crude oil by using either options or futures contracts. (20 marks) (ii) Make use of payoff diagrams to demonstrate and explain how the payoffs in each scenario would change depending on whether the price of oil was $70 or $90 per barrel. (20 marks) (iii) Rather than using options to reduce risk, what are the pros and cons of employing futures in PP's risk management strategy? (10 marks)