Suppose you are producing crude oil in the Permian basin which is lighter than the benchmark WTI, which is the underlying for the futures contract. Recenlty the standard deviation of daily changes in the WTI spot price has been about 1.30. You expect that this new, lighter crude will have a little more price uncertainty, perhaps 1.34 daily standard deviation. The correlation between these spot price changes is about 0.98.

You will produce 450,000 barrels of this crude next month. How many WTI contracts do you want to enter into to get the best hedge for the sales price? Do you go long or short these contracts? No need to round the number of contract. Put your answers in the yellow cells.

Remember that one WTI futures contract is for 1,000 barrels.

Std Dev of Correlation Std Dev of daily Permian of daily spot Number of daily WTI Light Crude price Estimated WTI Long or changes price changes changes Production Contracts Short? 1.3 1.34 0.98 450000