Supposeyou own a refinery which isa 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 you know next to nothing about markets andso you need to hire someoneto help you make decisions as to how to the 'play the game' and maximize profits.Naturally, you maximize profits by minimizing the cost of the input...oil ... and maximizing your revenue.....selling gas.We assume away all costs except for the input oil and we have the following production figures - each oil contract consists of 1000 barrels of crude and with 1000 barrels we can produce 100,000 gallons of gas.Each gas contract is for 50,000 gallons so for every oil contract that we buy we produce the equivalent of two gasoline contracts.We have a contract with BP for 500,000 gallons of gasoline for delivery at the end of May 2021 (10 gasoline contracts worth) and we need to buy the oil (5 contracts), the input, at the end of April to give us time to refine it in time for delivery.The charts below represent thefutures contract we consider - the May 2021 Gasoline contract.

Four different job applicants come in and you interview them....they all advise you a little differently.

1)Future guy (FG)- this person simply plays the futures market - so they would advise you to sell gasoline futures.

2)Going naked(GN)- this person doesn't hedge and would advise you to take your chances in the spot market - think of this person as having a high risk appetite.

3)The option buyer (OB)- this person would advise you to buy futures options puts on gasoline.

4)The option writer (OW)- this person would advise you to write futures options call on gasoline.

We consider the gasoline market (see graphic). The delivery date is May 2021.Suppose that the futures price of gasoline is $1.40 per gallon(as it is at point A) and that futures options, both puts and calls, are available at a price of $2,000 each (STRIKE PRICE = $1.40. EACH CALL AND PUT REPRESENTS ONE FUTURE CONTRACT). We consider two different scenarios with regard to this gasoline market and you need to figure out which of the job applicants have the best strategy given each scenario.

Gasoline Futures May, 2021