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# Future contracts- Hedging commodity risk

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An oil refining company enters into 1,000 long one-month crude oil futures contracts on NYMEX at a futures price of \$43 per barrel. At maturity of the contract, the company rolls half of its position forward into new one-month futures and closes the remaining half. At this point, the spot price of oil is \$44 per barrel, and the new one-month futures price is \$43.50 per barrel. At maturity of this second contract, the company closes out its remaining position.

Assume the spot price at this point is \$46 per barrel. Ignoring interest, what are the company's gains or losses from this futures positions.

#### Solution Preview

Before proceeding to summarize the calculations here, it's important to note that "unlike the stock market, futures positions are settled on a daily basis," (Investopedia, n.d.). That said, I'll assume that by disregarding interest throughout the duration of the contract, all that matters is the spot price at the contract's creation and maturity.

First position

1,000 long futures x \$43/barrel= \$43,000 due at maturity in exchange for 1,000 barrels of oil

First position at maturity nets \$1,000 profit
The spot price at maturity of this first contract \$44/barrel, so the oil company's future ...

#### Solution Summary

Explains future contract assessment using a hypothetical crude oil company. Valuation calculations are explained in detail. APA format with references.

\$2.19

## Veblen: Discuss Derivatives, Future Contracts to Hedge Currency and Interest Rate Risk

Jim Herman is the treasurer of the midsized corporation, Veblen International. The firm manufactures various plastic components used in the computer hardware industry. When the firm opened up, it initially did business in the Midwest region of the United States but now sells its components to customers in other countries. Mr. Herman request that you report and discuss some issues relating to futures contracts, which might be used in the future by the firm to hedge currency risk and interest rate risk. Some of the issues he needs to know more about include the following:

* possible benefits to the firm in using the futures markets
* functions and importance of forward markets
* concept of daily settlement
* regulatory responsibilities of the National Futures Association and the Commodity Futures Trading Commission
____________________________________________________________________________________

Mr. Herman was enlightened by the information you provided on risk reduction, futures, and forwards contracts but would like to learn if there are alternative methods available for dealing with currency risks. He requests that you research material from the Library and/or the Internet to construct a memo on the differences between taking a long position in a futures contract and taking a short position in a futures contract. Also, give an example of a business scenario in which it would be appropriate to use each of the contracts. If you were going to receive 100,000 Japanese yen in 6 months and the current exchange rate was 10 yen equals 1 U.S. dollar, how many yen would you sell or buy in the forward market? Be sure to cite all references using the appropriate format.

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