Canuck Oil Corporation is a Canadian crude oil producer. Today is July 15. Canuck’s estimated oil production level in three months’ time will be 100,000 barrels. The current spot price for crude oil is US$90.29 per barrel. Between January 15 and now, crude oil prices have fluctuated from a high of $110.82 to a low of $90.56. Due to the unstable nature of crude oil prices, Canuck Oil’s financial manager, Mr. Petro Stark would like to hedge the crude price risk using crude oil futures contracts. Petro found the following information on futures contracts expiring in September, October, and November: Delivery month Last Change Prior settlement Open High Low Volume September 90.79 –0.58 91.37 91.24 91.44 89.76 9067 October 92.18 –0.48 92.66 92.89 95.22 89.30 5229 November 90.13 –0.35 90.48 90.22
Canuck Oil Corporation is a Canadian crude oil producer. Today is July 15. Canuck’s estimated oil production level in three months’ time will be 100,000 barrels. The current spot price for crude oil is US$90.29 per barrel. Between January 15 and now, crude oil prices have fluctuated from a high of $110.82 to a low of $90.56.
Due to the unstable nature of crude oil prices, Canuck Oil’s
|
Delivery month |
Last |
Change |
Prior settlement |
Open |
High |
Low |
Volume |
|
September |
90.79 |
–0.58 |
91.37 |
91.24 |
91.44 |
89.76 |
9067 |
|
October |
92.18 |
–0.48 |
92.66 |
92.89 |
95.22 |
89.30 |
5229 |
|
November |
90.13 |
–0.35 |
90.48 |
90.22 |
90.55 |
89.08 |
1685 |
- Contract size: 1,000 barrels
- Contract currency: US dollar
- September expiry: September 16
- October expiry: October 16
- November expiry: November 16
- How can the company use futures contracts to hedge its crude price exposure?
- Assume that the company hedges using the futures contracts, and the settlement prices on the futures contract used change as in the table below. The company’s broker demands an initial margin of $600,000 and a maintenance margin of $500,000. Set up a margin account table using these settlement prices, assuming that any excess over the initial margin will be withdrawn and deposited into the company’s bank account.
|
Date |
Settlement Price |
Price Change |
|
July 16 |
$92.64 |
|
|
July 21 |
$95.82 |
$3.18 |
|
July 26 |
$96.44 |
$0.62 |
|
July 31 |
$94.35 |
–$2.09 |
|
Aug. 5 |
$97.34 |
$2.99 |
|
Aug. 11 |
$96.93 |
–$0.41 |
|
Aug. 16 |
$98.23 |
$1.30 |
|
Aug. 21 |
$98.26 |
$0.03 |
|
Aug. 26 |
$97.61 |
–$0.65 |
|
Aug. 31 |
$97.57 |
–$0.04 |
|
Sept. 5 |
$98.09 |
$0.52 |
|
Sept. 11 |
$98.23 |
$0.14 |
|
Sept. 16 |
$102.59 |
$4.36 |
|
Sept. 21 |
$103.81 |
$1.22 |
|
Sept. 26 |
$104.19 |
$0.38 |
|
Sept. 30 |
$104.76 |
$0.57 |
|
Oct. 5 |
$105.18 |
$0.42 |
|
Oct. 11 |
$106.06 |
$0.88 |
|
Oct. 15 |
$106.07 |
$0.01 |
|
Oct. 21 |
$103.83 |
–$2.24 |
|
Oct. 26 |
$101.88 |
–$1.95 |
|
Oct. 31 |
$100.56 |
–$1.32 |
|
Nov. 5 |
$101.73 |
$1.17 |
|
Nov. 11 |
$101.48 |
–$0.25 |
|
Nov. 16 |
$103.61 |
$2.13 |
|
Nov. 21 |
$102.93 |
–$0.68 |
|
Nov. 26 |
$104.06 |
$1.13 |
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