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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.

Please discuss answer in detail.

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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
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