Question

Southern Fuel has an inventory of 714,000 gallons of heating oil. The futures contracts on heating...

Southern Fuel has an inventory of 714,000 gallons of heating oil. The futures contracts on heating oil are based on 42,000 gallons. If the firm wishes to fully hedge its inventory, it should take which one of the following positions in heating oil futures contracts?

Select one:

a. Long on 17

b. Short on 16

c. Short on 17

d. Long on 15

e. Short on 15

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Answer #1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

It looks like Southern Fuel (SF) is in the business of Selling & Heating Oil.

And it needs to hedge its complete position.

The SF is afraid of oil price falling. He should hedge his position in such a way that if oil price falls, he gets a profit from it.

In this case when he goes short on Futures contract(s) on oil, as the price falls he will get the money. So that he will be able to recover his money from Futures contract when the prices fall.

And no.of Contracts = Inventory/ Futures contract size

= 714,000/ 42,000

= 17

Answer: C. Short on 17.

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