Shell Oil Refinery expects to pay for 100,000 barrel of crude oil at close of day on Wednesday, September 14th. They want to hedge their position with crude oil futures. Assume that they enter into the position at close of day on Friday, September 9th. The size of one crude oil futures is 1,000 barrel.Futures and spot data is provided in the file HW2_data.doc.

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

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

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

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

e.What is the total cost after they have closed out their futures position, and made their payment? f.What is the effective cost per barrel?

Hedge Ratio (hint:compute change first)

Date	Futures Price	Spot Price
8-Sep-16	$47.62	$47.63
7-Sep-16	$45.50	$45.47
6-Sep-16	$44.83	$44.85
2-Sep-16	$44.44	$44.39
1-Sep-16	$43.16	$43.17
31-Aug-16	$44.70	$44.68
30-Aug-16	$46.35	$46.32
29-Aug-16	$46.98	$46.97
26-Aug-16	$47.64	$47.64
25-Aug-16	$47.33	$46.97
24-Aug-16	$46.77	$46.29
23-Aug-16	$48.10	$47.54
22-Aug-16	$47.41	$46.80
19-Aug-16	$49.11	$48.48
18-Aug-16	$48.89	$48.20
17-Aug-16	$47.52	$46.81
16-Aug-16	$47.22	$46.57
15-Aug-16	$46.40	$45.72
12-Aug-16	$45.18	$44.47
11-Aug-16	$44.23	$43.51
10-Aug-16	$42.46	$41.75

Futures and spot data

Crude Oil Data

Daily Settlements for Crude Oil Futures (FINAL)Trade Date: Monday, 09/12/2016

Month	Open	High	Low	Last	Change	Settle	Estimated Volume	Prior Day Open Interest
OCT 16	45.57	46.51	44.72	46.06	+.41	46.29	768,365	287,665
NOV 16	46.21	47.07	45.32	46.62	+.38	46.84	332,045	373,759
DEC 16	46.78	47.64	45.93	47.21	+.37	47.44	112,923	287,538
JAN 17	47.38	48.24	46.57	47.77	+.36	48.05	41,957	125,520
FEB 17	47.84	48.82	47.15	48.40B	+.36	48.65	23,514	64,143
MAR 17	48.05	49.34	47.69	49.00	+.36	49.19	17,542	115,647

Daily Settlements for Crude Oil Futures (FINAL)Trade Date: Wednesday, 09/14/2016

Month	Open	High	Low	Last	Change	Settle	Estimated Volume	Prior Day Open Interest
OCT 16	45.00	45.33	43.42	43.63A	-1.32	43.58	725,854	197,746
NOV 16	45.60	45.87	44.00	44.23	-1.33	44.15	372,673	427,858
DEC 16	46.17	46.48	44.63	44.90B	-1.34	44.78	138,462	294,385
JAN 17	46.92	47.09B	45.28	45.55B	-1.32	45.44	34,190	121,311
FEB 17	47.54	47.73	45.96	46.20	-1.30	46.10	24,234	72,235
MAR 17	48.18	48.31	46.54	46.82	-1.27	46.70	29,472	118,854

Spot data:

2016/09/09 45.88

2016/09/12 46.28

2016/09/13 44.91

2016/09/14 43.62