The scenario as follows:

Mainfreight Ltd is a delivery company whose expenses are tied to fuel prices. You have been approached by John Murray, CEO of Mainfreigh, to advise on hedge strategy on fuel prices using futures.

Mainfreight uses 90,000 liters of fuel per month. It is currently July the 1st and John want to hedge it's next three months of fuel costs using fuel future contracts. Information on these contracts is as follows:

Each contract is for 42,000 liters.

Contracts expire at end of prior month. For example the contract expires at the end of July. The initial margin is $11,475 and the maintenance margin is $8,500

Questions as follows:

a) should you buy or sell to initiate your position?

b) How many contracts should you use?

c) What is your initial cash flow?

d) Assume that Mainfreight had not hedge it's position with futures. Assume also that the average fuel prices for the next 3 months are $3.25 (July), $3.00 (August), and $2.80 (September). Current prices is $3.50. How much did Mainfreight save/lose compared to the current price? (Ignore the futures for this question)

e) assume the futures contracts closed at the following prices;

August: $2.6813

September: $2.4140

October: $2. 0999

How much did you gain/lose on your futures contracts?

f) Was it a good hedge? Why? Explain