An oil producer closes a deal to sell 10,000 barrels of oil in 3 months while...
An oil producer closes a deal to sell 10,000 barrels of oil in 3 months while the current oil price is $ 30 and the forward price is $ 29. Let me say that it takes a negative stance on a FORWARD for selling 10,000 barrels of oil in 3 months. It is seen that in 3 months the price of oil drops to $ 28. Calculate the gain / loss from its position in the Forward. How do you judge his decision to use Forward for compensation?
Homework Answers
Current oil price =$30
3 months Forward price = K = $29
Spot price(St) at the time of maturity (after 3 months) = $28
In this case of short position, oil producer has a gain of (St-K)
Total Gain = (29-28)×10000 = $10,000
So, it is a good decision by engaged in forward contract. Oil producer will get 10,000 dollars less if he was not engaged in forward contract.
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An oil producer closes a deal to sell 10,000 barrels of oil in 3 months while...
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