Your utility company will need to buy 125,000 barrels of oil in 10 days time, and it is worried about fuel costs.
Suppose you go long 125 oil futures contracts, each for 1,000 barrels of oil, at the current futures price of $60.00 per barrel. Suppose futures prices change each day as follows
a. What is the mark-to-market profit or loss (in dollars) that you will have on each date?
b. What is your total profit or loss after 10 days ? Have you been protected against a rise in oil prices?
c. What is the largest cumulative loss you will experience over the 10?-day period? In what case might this be a problem?