Suppose that you operate an oil refinery in Louisiana, and your firm buys crude oil and turns it into gasoline. It is April, and the current spot price of crude oil is $$70\mathrm{.}00.$ You are planning to have $100,000$ barrels of crude delivered in May, so that you can refine it into gasoline in time for the summer driving season. Currently, June futures contracts are trading at $$80\mathrm{.}00$ per barrel. Each crude futures contract is for $10,000$ barrels.

If you want to hedge the risk of oil price fluctuations between now and the time you ramp up gasoline production, will you buy or sell futures contracts?

$2$

How many contracts will you buy or sell?

How much money will you receive or pay in this transaction?

May now arrives and spot crude oil prices have risen to $$75$ and June futures prices have risen to $$85.$ You settle your futures position by offset. What is your profit or loss on the futures position?

At the same time, you buy crude on the spot market. Compare what you actually pay for the crude in May with what you would have paid had you bought the crude in April.