Supposeyouare in charge of an oil refinery which means you, as in your firm, are a user of crude oil and a producer of gasoline.As we know, both crude oil and gasoline are part of a well developed financial market so that futures and futures options markets exist that are extremely liquid for these two commodities.Suppose that the current (spot) and futures price of crude oil, per barrel, is $100.Suppose also that the current (spot) and futures price of gasoline is $3.00 per gallon.Each futures contract in oil represents 1,000 bbl and each futures contract in gasoline represents 50,000 gallons (its 42, 000 in the real world but we will use 50,000 since it is easier to work with).So you have this contract with Exxon, the user of the gasoline, to sell them 500,000 gallons of gas at the end of December.In order to produce the 500,000 gallons of gasoline you need 10,000 barrels of oil.The producer of crude oil is Saudi Arabia.Please answer the following TF questions.(WE ASSUME THAT YOU CAN TURN CRUDE INTO GAS IMMEDIATELY)

IMPORTANT: For the true / false questions type in T for true and F for false.

For the numerical questions

QUESTIONS

1. When you buy futures contracts in crude oil you are protecting (hedging) yourself from low (oil) prices in the future.(T for true, F for false)
2. Suppose you sell 10 contracts of December gasoline where the spot and futures price is $3.00 per gallon. If (spot) gas prices rise and end up at $3.20 at the end of December then your boss wants to give you a bonus, since entering the futures contract was profitable for your company (as compared to not entering a futures contract at all).(T for true, F for false)

1. To protect against low gas prices at the end of December, when you sell the gas, you could sell a futures contract to Exxon since Exxon has the opposite concerns in terms of the price of gasoline in the future and thus, Exxon would be willing to buy a futures contract to lock in a price (per gallon) now.(T for true, F for false)
2. If Saudi Arabia (the producer of the crude) wanted to lock in a price of crude to protect against low prices in the future then they would sell futures contracts in crude oil.(T for true, F for false)

Suppose that all parties, there are three of them (Saudi Arabia, you, and Exxon), take the appropriate hedges with the current and futures prices of oil and gasoline equaling $100/bbl and $3.00/gallon respectively. Note that all players are either buying or selling 10 futures contracts since 10 oil futures contracts represents 10,000 barrels of oil which is just enough for you to (immediately as assumed) make 500,000 gallons of gas to sell to Exxon.

Let's consider the plight of all the players if the spot prices, at expiration, for oil and gas are $ 110 per bbl and $3.20 per gallon respectively.

1. Given the change in the spot prices at expiration, in terms of profits, as defined as revenues (from selling gas) minus costs (from buying oil)}, it didn't matter that you entered into the futures contract, since profits are identical either way (excluding transactions costs).(T for true, F for false)
2. Given the change in the spot prices at expiration, your boss is happy with you about your oil hedge but sad about your gas hedge.(T for true, F for false)
3. Given the change in the spot prices at expiration, Exxon benefited by entering into their futures contracts and Saudia Arabia wish they hadn't entered into their futures contracts.(T for true, F for false)

Futures Options

We now consider the futures options market for oil and gas.Suppose futures options calls and puts are available.In particular, futures options calls and puts in oil, with a strike price of $100 per barrel, are selling for $3,000 (per contract); futures options calls and puts in gasoline, with a strike price of $3.00 per gallon are selling for $5,000 (per contract). Each futures option represents one futures contract.

Exxon, to hedge against high gas prices in the future, would purchase futures options puts in gasoline.(T for true, F for false)

The diagram (see below) shows the profit loss functions for the oil and gasoline futures and futures options markets.Please use the diagram to answer the following 5 questions noting that we are dealing with10futures contracts and/or 10 futures options puts/calls

1. The spot price of oil at expiration (Point A in the upper left hand graph) such that the bear in oil is indifferent between playing the futures and/or the futures options market isType in one of the following (no $ signs) 101 102 103 104 105 110
2. The break even price for the bull in oil playing the futures option market (point B) isType in one of the following (no $ signs) 101 102 103 104 105 110
3. The spot price of gasoline at expiration (Point C in the lower right hand graph) such that the bull in gasoline is indifferent between playing the futures and/or the futures options market isType in one of the following (no $ signs) 2.802.852.902.95
4. The breakeven spot price at expiration for the bull in gas playing the futures options market is (point D):Type in one of the following (no $ signs) 3.05 3.10 3.15 3.20
5. The profit for the bull that bought the futures contracts in gas (the value at E) is:Type in one of the following (no $ signs) 50K 75K 100K 125K 150K
6. The profit for the bull that bought the futures options calls in gas (the value at F) is:Type in one of the following (no $ signs) 50K 75K 100K 125K 150

OIL MARKET 100 A Futures 100 Futures Price at Exp B Price Exp Gas Market E F 3.00 C 3.00 Futures Price at Exp D 3.20