1. Shell Oil Refinery expects to pay for 100,000 barrel of crude oil at close of day on Friday, January 3 They want to hedge their position with crude oil futures. Assume that they enter into the position at close of day on Tuesday, January 28. The size of one crude oil futures is 1,000 barrel. Futures and spot data is provided in the file HW2_data.doc.

1. Describe the position they should enter (long or short, contract month).

2. Compute the hedge ratio using data from HW2_data.xls file.

3. How many contracts do they need to buy or sell?

4. Document the price gain or loss every day that their position is open.

5. What is the total cost after they have closed out their futures position, and made their payment?

6. What is the effective cost per barrel?

Crude Oil Data Daily Settlements for Crude Oil Futures (FINAL)Trade Date: Wednesday, 01/29/2020 Month Open High Open High Low Low | Last Prior Day Change Settle Estimated Volume Open Interest MAR 20 53.97 54.37 52.81 53.08 -.15 53.33 638,404 478,095 APR 20 54.00 54.39 52.87 53.16 -.11 53.41 114,006 158,130 MAY 20 54.00 54.3252.86 53.17A -.06 53.42 85,335 138,002 JUN 20 53.86 54.1652.75 53.07 .02 53.31 90,582 226,032 JLY 20 53.27 53.8652.56 52.85 +.02 53.10 44,378 100,993 AUG 20 53.00 53.50 52.35 52.61 +.03 52.81 20,108 68,666 Daily Settlements for Crude Oil Futures (FINAL)Trade Date: Friday, 01/31/2020 Estimated Prior Day Month Open High Low Last Change Settle Volume Open Interest MAR 20 52.92 53.36 50.97 51.63 -58 51.56 | 853,977 469,599 APR 20 52.97 53.42 51.09 51.75 -55 51.68 159,913 159,547 MAY 20 52.98 53.43 51.18 51.80 .50 51.77| 120,952 163,147 JUN 20 52.99 53.36 51.22 51.86B -.43 51.80 141,895 223,060 JLY 20 52.78 53.19 51.23A 51.72 36 51.74 69,715 111,390 AUG 20 52.49 52.92 51.10 51.61 -30 51.59 43,901 72,531 Spot data: 2020/01/28 53.33 2020/01/2953.29 2020/01/30 52.19 2020/01/31 51.59 Crude Oil Data Daily Settlements for Crude Oil Futures (FINAL)Trade Date: Wednesday, 01/29/2020 Month Open High Open High Low Low | Last Prior Day Change Settle Estimated Volume Open Interest MAR 20 53.97 54.37 52.81 53.08 -.15 53.33 638,404 478,095 APR 20 54.00 54.39 52.87 53.16 -.11 53.41 114,006 158,130 MAY 20 54.00 54.3252.86 53.17A -.06 53.42 85,335 138,002 JUN 20 53.86 54.1652.75 53.07 .02 53.31 90,582 226,032 JLY 20 53.27 53.8652.56 52.85 +.02 53.10 44,378 100,993 AUG 20 53.00 53.50 52.35 52.61 +.03 52.81 20,108 68,666 Daily Settlements for Crude Oil Futures (FINAL)Trade Date: Friday, 01/31/2020 Estimated Prior Day Month Open High Low Last Change Settle Volume Open Interest MAR 20 52.92 53.36 50.97 51.63 -58 51.56 | 853,977 469,599 APR 20 52.97 53.42 51.09 51.75 -55 51.68 159,913 159,547 MAY 20 52.98 53.43 51.18 51.80 .50 51.77| 120,952 163,147 JUN 20 52.99 53.36 51.22 51.86B -.43 51.80 141,895 223,060 JLY 20 52.78 53.19 51.23A 51.72 36 51.74 69,715 111,390 AUG 20 52.49 52.92 51.10 51.61 -30 51.59 43,901 72,531 Spot data: 2020/01/28 53.33 2020/01/2953.29 2020/01/30 52.19 2020/01/31 51.59