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On June 1, an energy trader is committed to purchase 50,000 barrels of crude oil...

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Finance

  1. On June 1, an energy trader is committed to purchase 50,000 barrels of crude oil on November 15 and he wants to use the December crude oil futures (six-month contracts) to hedge risk. Currently the December futures price is $25 per barrel. The standard deviation of monthly changes in the price of crude oil is 2.1, and the standard deviation of monthly changes in the price of six-month crude oil futures is 1.2. The correlation between the futures price changes and the spot price changes is 0.7. Each contract is for the delivery of 1,000 barrels of crude oil. How many futures contracts should the company use to hedge its future purchase? What futures position should the company take?

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