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Baytown Refinery Corporation, a large Texas oil refinery, would like to hedge against adverse movements in...

  1. Baytown Refinery Corporation, a large Texas oil refinery, would like to hedge against adverse movements in the price of oil because oil is the firm’s primary materials. What should the firm do?
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Answer #1

Please find below the solution.. let me know if you need any clarification.

Firm can use below transaction to hedge -

1) Forward contract : Firm can entre into buy forward contract which will help us to lock in the price now itsef.

2) Future contradt: Firm can take long position in future of oil this will help when price increases in future than firm will make money in future contract which will offset loss in oil delivery (Spot) market.

3) Option can also be purchased- Mainly the call option.

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