Question: An oil marketing company is concerned about volatility in its revenues. oil currently sells for $120 a barrel. but the price is volatile and could fall as low as $100 or rise as high as $140 in the next month. The company will bring (able to sell) 100,000 barrels to the market next month.
What will be the total revenues if the firm remains un-hedged for oil prices of $140,120,$100 a barrel?
b. the futures price of oil for delivery in one month is $115. Calculate the firm's total revenues at each oil price (compare futures with the original do-nothing scenarios outcomes) if the firm enters a one-month futures contract to deliver 100,000 barrels of oil
c. Calculate the total revenues be if the firm buys a 1 -month put option to sell oil for $115 a barrel. The puts cost $6 per barrel (option premium).
d. Evaluate at least 3 factors that should be considered when using a particular type of derivative contract.