Question: You are the risk manager of an energy producing company. Your firm explores for and extracts crude oil. Your firm regularly produces approximately 50,000 barrels of oil monthly. You watch the energy markets closely and determine in early May 2011 that the current market price of $110 per barrel maybe a temporary peak. '
Requirement:
Q1. Construct both a futures and options hedge to lock in this $110 bbl price for the next 6 months. Be certain to specify contracts, quantities, dates and all relevant and pertinent information for this hedge, including the actions required to complete the hedge at the end of the time horizon.
Q2. Discuss the advantages and disadvantages of the futures and options hedging strategies in the above question. Be sure to discuss the important aspects of the two hedging strategies including, but not limited to, the capital requirements.