QUESTION 1: (10 Marks)

1. (2 marks) The current price of crude oil for delivery in 3 months is $3.20/gallon and the current price for gasoline for 3 month delivery is $3.50/gallon. Both of these futures contracts are for 42,000 gallons. You think the current spread (30) is too large. What positions would you take today in order to profit from this expectation? Explain how you would incur a loss or make a profit.
2. (3 marks) You terminate the spread from (a) in 1 month when the 2 month crude futures is $3.00/gal and the 2 month gasoline futures is $3.10/gal. Calculate and explain the profit or loss.
3. (3 marks) Repeat (b) except change the crude futures to $3.30/gal. and the gasoline futures to $3.80/gal. Calculate and explain your profit or loss.

4. (2 marks) If your company refines crude oil into gasoline, explain what positions you would take in part (a).