Answer to Question #120277 in Management for Kgothatso

Question

It is now June . A company know that it will sell 5000 barrel if crude oil In September it uses the October CME Group future contact to hedge the price it will receive . Each contact is on 1000 barrier of light sweet crude . What position should it take ? What price risks is it still exposed to after taking the position?

Answer 1

The company should short five contracts. It is exposed to a basis risk. Besides, it is exposed to the difference between October futures price and the spot price of light sweet crude at the moment it closes its position in September. Moreover, it is exposed to the difference between the spot price of the kind of oil it is selling and the spot price of light sweet crude.