Hello. I need help with this homework problem. It\'s Finance related and involve

Question

Hello. I need help with this homework problem. It's Finance related and involves oil. Thanks!

You are the owner of a small refinery and are worried about limiting your exposure to the market. Your refinery can process 9,000,000 barrels of WTI crude oil each month. Since the refinery is set up on a 3-2-1 crack spread, you can produce 6,000,000 barrels of RBOB and 3,000,000 barrels of heating oil each month. For the month of May 2016, you have the following physical trades below. How could you use futures contracts to eliminate your exposure for the month of May? Specifically state what contracts you would need, how many, what position you would need to take, and at what prices they would have to be in order to eliminate your exposure. (10 points)

Physical Forward: BUY 9,000,000 bbls of WTI from ExxonMobil for 43.50 USD / bbl.

Physical Forward: SELL 6,000,000 bbls of RBOB to CITGO Petroleum for 1.50 USD / gal

Physical Forward: SELL 3,000,000 bbls of Heating Oil to Calpine for 1.30 USD / gal

Explanation / Answer

Assumptions: 1 bbl = 42 gal ( 1 barrel =42 gallons)

1. The firms can buy a forward of 9,000,000 bbl from exon at 43.50 and hence its acquaistion price will be 43.50/bbl

2. When the firms sells a forward, it sells 6,000,000 bbls of RBOB at 1.50 * 42 = $63/bbl

3. Similarly, when it sells a forward for 3,000,000 bbls of heating oil for 1.3 USD/bbl, It sells at 1.3* 42 = $54.6/bbl

Now the toal expense is 43.50

Income is 63 * 6/9 + 54.6 * 3/9 = 60.20

Hence Profit per barrel is 60.20 - 43.50 = $16.7/bbl

Hence total profit by these three forward contract is 16.7 * 9,000,000 = $150,300,000

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