Question
Suppose you are the CFO of an oil refiner and you wish to hedge your future production price risk of crude oil using options. Your
Suppose you are the CFO of an oil refiner and you wish to hedge your future production price risk of crude oil using options. Your company will produce a total of 7.5 million barrels of oil over the next three months.
The six-month crude oil futures contract is trading at $57/bbl. The price of the three-month 54 put is $3.25/bbl. The price of the three-month 61 call is $3.05/bbl.
Instead of selling futures contracts at $57 to hedge your risk, you decide that you will sell the 61 call options AND purchase the 54 put options to hedge your price risk.
a. How many contracts of each option do you need to sell/purchase? (Round answer to zero decimals. Do not round intermediate calculations)
b. What is your total cash outlay? (Round answer to zero decimals. Do not round intermediate calculations)
c. What is your breakeven point in terms of the oil settlement price? (Round answer to 2 decimal places. Do not round intermediate calculations)
d. What is your maximum loss (in $/bbl)? (Round answer to 2 decimal places. Do not round intermediate calculations)
e. What is your maximum gain (in $/bbl)? (Round answer to 2 decimal places. Do not round intermediate calculations)
f. If the price of oil settles at $63 in four months, what is your net selling price? (Round answer to 2 decimal places. Do not round intermediate calculations)
g. If the price of oil settles at $57 in four months, what is your net selling price? (Round answer to 2 decimal places. Do not round intermediate calculations)
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