Oil is selling at a spot price of $41.98 per barrel. Oil can be stored at a cost of $0.42 per barrel per month. The opportunity cost of capital is 0.5% per month. What is the gain or loss realized by an oil refinery that floats its exposure and purchases oil on the spot market in 2 months at a price of $42.62 per barrel, instead of hedging with a forward contract?

Oil is selling at a spot price of $41.98 per barrel. Oil can be stored at a cost of $0.42 per barrel per month. The opportunity cost of capital is 0.5% per month. What is the gain or loss realized by an oil refinery that floats its exposure and purchases oil on the spot market in 2 months at a price of $42.62 per barrel, instead of hedging with a forward contract?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 8P

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