On December 4 you agree to sell 200,000 barrels of crude oil to a refiner for de
ID: 2749780 • Letter: O
Question
On December 4 you agree to sell 200,000 barrels of crude oil to a refiner for delivery in May the following year. You are worried about the oversupply of crude oil and want to protect yourself against price decreases. A June put option with USD 17.00/barrel strike is trading for USD 1.05/barrel. The June crude oil futures contract is trading at USD 17.05/barrel on December 4. Your delta is 0.58. The expected basis in May is USD -$0.76/barrel. (The crude oil futures contract is for 1000 barrels.)
a)How many put options should you buy on December 4?
b)What is the expected minimum selling price for your crude oil on December 4 assuming commission is zero?
c)On March 3, the June crude oil futures contract is trading at USD 15.83/barrel. The June USD 17.00/barrel put is trading for USD 1.56/barrel, and the delta is now 0.93. How would you update your hedge
d)On May 12, the June crude oil futures is trading at USD 15.05/barrel. The June USD 17.00/barrel put is trading at USD 1.95/barrel. You sell your 200,000 barrels of crude oil at USD 14.68/barrel. What was the net price of your 200,000 barrels of crude oil?
Explanation / Answer
A. Delta 0.58 Number of options to buy = Delta hedge quantity/(delta*contract multiplier) Assume 1 contract is for 1000 barrel Number of put options to buy = 200,000/(0.58*1000) 344.8275862 buy put option CONTRACTS B. Bais risk is the difference between spot rate and forward rate Forward rate 17.05 per barrel futures Basis risk -0.76 16.29 expected minimum selling price for your crude oil on December 4 Basis is defined as the difference between your local cash market price and the futures price on a particular date Basis = Cash Price minus Futures Price C. Delta 0.93 Number of options to buy = Delta hedge quantity/(delta*contract multiplier) Assume 1 contract is for 1000 barrel Number of put options to buy = 200,000/(0.93*1000) 215.0537634 buy put option CONTRACTS The futures market is becoming profitable as the futures price has deduced from 17.05 to 15.83$ So we can sell some put option contracts 129.7738228 i.e.(344.83-215.053)option CONTRACTS can be sold D. The 200000 is sold at 14.68 per barrrel,and the option contract is not executed.Ideally it shoul dhave been executed If it was sold with put option contract it would have been at 17$. So net price would have been 17 - 1.95 = 15.05$ If he has bought the put option and had sold at 17$ net price would have been 15.05,but he has sold at 14.68$ At 14.68 29360000 $ so he has lost his prremium of 1.95 12.73 $ is net price per barrel if he has bought put option in may and not executed.
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