Question

if i am a consumer of oil,such as an airline, and i want to make sure that i do not pay more than $60/bbl for fuel during the next five years, what sort of commodities transactions can i make today?

Answer 1

In this case, we can buy a call such that at the end of the agreement during the delivery, we would get the required amount of fuel for $60/bbl. We would have to buy multiple call options for different durations (depending on what time in each year, we require the delivery to be made).

Buying a call would ensure that we lock the prices of oil at $60/bbl. Thus, in case the prices go up, we can exercise the right to buy oil at $60/bbl and in case the price falls below $60/bbl, we would not buy the oil because we have a right and not an obligation to buy the oil.

The strike price of the call option would be $60/bbl.

In case we expect the oil price to increase over the next five years, we can also undergo a futures contract. However, in this case, we would have to buy the oil at $60/bbl even if the price falls below $60/bbl due to some reason