It isMarch, and Alberta Oil Refinery(AOR) has enough crude oil in inventory to continue refinery operations until September. AOR expects to need to purchase 500,000 barrels of oil in September. Management at AOR is concerned about oil price volatility. Futures contracts for September delivery are available with a futures price of $120 per barrel. Options contracts with a strike price of $120 and expiration in September are alsoavailable; puts cost $25 and calls cost $20. Complete parts a through e.

a. Describe how AOR can fully hedge using oil futures contracts.

A.

AOR can hedge by taking an intermediate position in futures for 500,000 barrels of oil for September delivery.

B.

AOR can hedge by taking a long position in futures for 500,000 barrels of oil for September delivery.

C.

AOR can wait until prices rise in the future.

D.

AOR can hedge by taking a short position in futures for 500,000 barrels of oil for September delivery.

b. Given the strategy in a, what will be the total net amount paid by AOR(for all 500,000 barrels) if the price of oil in September is asfollows:

i. $70 perbarrel; ii.$120 perbarrel; iii. $170 per barrel

i.$70 perbarrel; the total net amount paid by AOR=$

ii.$120 perbarrel; the total net amount paid by AOR=$

iii.$170 perbarrel; the total net amount paid by AOR=$

(Round to the nearest milliondollars.)

c. Describe how AOR can fully hedge using options.

A.

AOR can sell the put options on 500,000 barrels of oil.

B.

AOR can purchase the put options on 500,000 barrels of oil.

C.

AOR can purchase the call options on 500,000 barrels of oil.

D.

AOR can sell the call options on 500,000 barrels of oil.

d. Given the strategy in c, what will be the total net amount paid by AOR(for all 500,000 barrels) if the price of oil in September is asfollows:

i.$70 perbarrel; ii.$120 perbarrel; iii.$170 per barrel

i.$70 perbarrel; the total net amount paid by AOR=$

ii.$120 perbarrel; the total net amount paid by AOR=$

iii.$170 perbarrel; the total net amount paid by AOR=$

(Round to the nearest milliondollars.)