Consider an oil drilling firm planning to sell 10,000 barrels of oil in February, 2018. The current (November, 2017) oil price per barrel is $50 per barrel.
a. What is the risk of firm? Circle one. Increase or Decrease in the price of oil.
b. Each futures contract is for 1,000 barrels. How many futures contracts does this firm need to sell or buy today to hedge the risk you defined above?
c. Checking the price of futures contracts, we see that the price of February oil is $52 per barrel. Fill out the below table by taking into account the number of futures contracts you found above.
If the market price of oil is $55 per barrel in February,
Revenue from the sale of oil in February =
Futures transaction in November (sale or buy) =
Futures transaction in February (sale or buy) =
Gain or Loss on futures transaction =
Total Revenue =
If the market price of oil is $48 per barrel in February,
Revenue from the sale of oil in February =
Futures transaction in November (sale or buy) =
Futures transaction in February (sale or buy) =
Gain or Loss on futures transaction =
Total Revenue =