Question
It is now Nov 2018. A company anticipates that it will buy 1.0 million barrels of light sweet crude oil in August 2019. CME Light
It is now Nov 2018. A company anticipates that it will buy 1.0 million barrels of light sweet crude oil in August 2019. CME Light Sweet Crude futures contracts (1 contract is for 1,000 barrels or 42,000 gallons) are available for hedging price risk. Company policy is to hedge 90% of its exposure and to use at all times futures contracts maturing in less than eight months. Suppose you are this companys risk manager. a) State the proper strategy for hedging the Aug 2019 purchase. b) Given the following set of prices ($, per barrel), determine the price/barrel the company realized for its Aug 2019 crude oil purchases.
Date | Nov 18 | Dec 18 | Jan 19 | Feb 19 | Mar 19 | Apr 19 | Aug 19 |
Spot Price | 60.00 | 61.50 | 62.60 | 64.00 | 64.50 | 66.00 | 71.00 |
Feb 19 Futures | 61.12 | 61.70 | 63.10 | ||||
Mar 19 Futures | 64.28 | 64.40 | 64.60 | 65.00 | |||
Apr 19 Futures | 65.91 | 66.00 | 67.20 | 67.20 | 68.16 | ||
May 19 Futures | 66.18 | 66.50 | 67.60 | 67.90 | 68.95 | 69.05 | |
Sep 19 Futures | 67.43 | 67.45 | 68.20 | 69.00 | 70.02 | 71.33 | 72.00 |
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