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Calculate total profit or loss on futures position

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Reference no: EM132842794

It's April 2021. You are an oil distributor, planning to buy 400,000 barrels of crude oil from British Petroleum (BP) in April 2022 in exchange for a spot price prevailing at that time. Because April 2022 spot price is unknown today, your objective is to hedge this risk. Suppose that the only available contract is for May 2022 delivery. Today the futures price of crude oil for May 2022 delivery is $65.37. Contract size for crude oil is 1000 barrels. Assume that there is no excessive volatility during delivery month.

Suppose that in April 2022 the futures contract's price turns out to be $55.00 a barrel and spot price turns out to be $50.00 a barrel

(a) Calculate total profit or loss on your futures position

(b) What is the overall price per barrel paid by the oil distributor in April 2022 after taking into account profits or losses on the futures position? Show your calculations.

Reference no: EM132842794

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