Question
Suppose you own a refinery which isa user of crude oil and a producer of gasoline.As we know, both crude oil and gasoline are part
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 April 2021 contract.
OIL FUTURES APRIL 2021
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