Today is late March. Your company, Falcon Refining Inc., buys 1,000,000 barrels of crude oil at the end of each month to produce a variety of petroleum products. You have the following market data.

• Spot price of light, sweet crude oil: S₀ = $49.00/bbl.

• Futures price of May NYMEX light, sweet crude oil contract: F₀ = $50.88/bbl.

• Trading in a NYMEX crude oil futures contract ceases shortly before the contract month begins. Delivery can be as early as the first calendar day of the contract month. For this analysis, assume that time to expiration of the May contract (more precisely, time until the start of the delivery month) is T = 1/12 year.

• Your storage cost for crude oil is $0.125 per barrel per month. Assume that you must pay in advance.

• Continuously compounded one-month risk-free rate: r = 1% per year.

Given current spot and futures prices, should your company hedge its late April purchase with crude oil futures? If yes, what hedging strategy should you adopt?

Group of answer choices

Do not hedge with crude oil futures.

Hedge: take a short position in 1,000 May crude oil futures contracts. Close out your futures position in late April.

Hedge: take a long position in 100 April crude oil futures contracts. Close out your futures position in late April.

Hedge: take a short position in 100 April crude oil futures contracts. Close out your futures position in late April.

Hedge: take a long position in 1,000 May crude oil futures contracts. Close out your futures position in late April.