Basic Energy Risk Hedging

Assume you are working for an oil producing company and the date is D2. You are planning to deliver and sell 100,000 barrels of crude oil to the spot market on D1. You want to hedge the company’s profit against the price fluctuations.
• Explain what steps you will take.
• How much money will you lose or gain without hedging?
• How much money will you lose or gain with hedging?
• Note: you can assume the P4 as your price goal.
Long Hedge
Assume you are working for a refinery that is planning to buy 100,000 barrels of crude oil in the Gulf Coast spot market on D1. You wish to hedge the company’s profit against the price fluctuations.
• Explain what steps you will take.
• How much money will you lose or gain without hedging?
• How much money will you lose or gain with hedging?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sample Solution

ACED ESSAYS