Today is late March. Your company, Mesquite Bush Refining Inc., produces 42,000,000 gallons of ultra low sulfur diesel (ULSD) fuel at the end of each month. You have the following market data.

• Spot price of ULSD diesel fuel: S₀ = $2.00/gal.
• Futures price of June NYMEX New York Harbor ULSD futures: F₀ = $1.84/gal.
• Size of the underlying for this futures contract: 42,000 gallons
• Trading in a NYMEX New York Harbor ULSD contract ceases shortly before the contract month begins. For this analysis, assume that time to expiration of the June contract (more precisely, time until the start of the delivery month) is T = 2/12 year.
• Your storage cost for ULSD diesel is $0.125 per barrel per month. Assume that you must pay in advance.
• Continuously compounded one-month risk-free rate: r = 2% per year.

Given current spot and futures prices, should your company hedge its late May sale with ULSD futures? If yes, what hedging strategy should you adopt? (Assume that your company is willing to hedge only at a fair price or better.)

Group of answer choices

Hedge: take a long position in 1,000 June ULSD futures contracts. Close out your futures position in late May.

Hedge: take a short position in 100 May ULSD futures contracts. Close out your futures position in late May.

Hedge: take a short position in 1,000 June ULSD futures contracts. Close out your futures position in late May.

Hedge: take a long position in 100 May ULSD futures contracts. Close out your futures position in late May.

Do not hedge with USLD futures.