It is now June. A company knows that it will sell 5,000 barrels of crude oil in September. It uses the October CME Group futures contract to hedge the price it will receive. Each contract is on 1,000

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19.07.2022 - 01:07

It is now June. A company knows that it will sell 5,000 barrels of crude oil in September. It uses the October CME Group futures contract to hedge the price it will receive. Each contract is on 1,000

Question:

It is now June. A company knows that it will sell 5,000 barrels of crude oil in September. It uses the October CME Group futures contract to hedge the price it will receive. Each contract is on 1,000 barrels of ‘light sweet crude.’ What position should it take? What price risks is it still exposed to after taking the position?

Answers (1)

Stella April 10, 2023 в 20:18

The company should sell 5 October futures contracts, as each contract covers 1,000 barrels of crude oil. By selling the futures contracts, the company can lock in the price it will receive for the crude oil it will sell in September. However, the company is still exposed to basis risk, which is the difference between the futures price and the actual market price when the oil is delivered in September. The futures price may not perfectly reflect the market price at the time of delivery, causing potential losses or gains for the company. Additionally, the company is still exposed to quantity risk, which is the possibility that it may not sell the expected 5,000 barrels of crude oil in September.

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