Question

you want to build a natural gas fired power plant. how would you structure commodities trades in order to lock in your profit?

Answer 1

For this, we can buy a futures contract to deliver a certain number of oil barrels at a given price such that we get the desired level of profits while being competitive at the same time in the market. The futures contract would enable us to sell the required amount of oil barrels at the pre-determined price in the futures contract.

In this case, as we have already determined our costs and the profits that we want to achieve for a given period, the futures contract would enable us to lock in the profits as irrespective of the market price, we would sell our barrels at a price that helps us get the required profits