Question

Southern Fuel has an inventory of 756,000 gallons of heating oil. The futures contracts on heating oil are based on 42,000 gallons. If the firm wishes to fully hedge its inventory, it should take which one of the following positions in heating oil futures contracts? Multiple Choice long on 16 long on 17 short on 18 short on 19 short on 20

Answer 1

Answer:

short on 18

Explanation:

The computation is shown below:

= Number of gallons of heating oil ÷ future contracts based on heating oil

= 756,000 gallons ÷ 42,000 gallons

= 18

It shows a ratio between the number of gallons of heating oil and future contracts based on heating oil so that the correct position in heating oil futures contracts can come and the same is presented above.