Question

How many CME Crude Oil Contracts (CME Symbol CL) would an electric utility need to buy or sell to hedge price exposure on 1,500,000 barrels of oil?

a. Buy 1,500 contracts
b. Sell 1,500 contracts
c. Buy 1,000 contracts
d. Sell 1,000 contracts

Answer 1

An electric utility would need to sell 1,500 contracts of CME Crude Oil (CME Symbol CL) to hedge price exposure on 1,500,000 barrels of oil.

Step-by-step explanation:

To hedge price exposure on 1,500,000 barrels of oil, an electric utility would need to sell 1,500 contracts of CME Crude Oil (CME Symbol CL). Selling contracts allows the utility to lock in a price for future delivery, thereby protecting against potential price fluctuations. The question relates to how an electric utility can use CME Crude Oil Contracts to hedge against price exposure for a specified amount of crude oil. Each CME Crude Oil Contract, with the symbol CL, represents 1,000 barrels of oil. Therefore, to hedge against price exposure for 1,500,000 barrels, the utility would need to engage in transactions involving 1,500 contracts. Specifically, if they wish to hedge against rising prices, they would buy futures contracts; conversely, to hedge against falling prices, they would sell futures contracts.