In September of 2014,Gunny Corporation Anticipates That the Price of Heating

Essay

In September of 2014,Gunny Corporation anticipates that the price of heating oil will increase soon,and wishes to lock in a firm price for the winter months.They enter into a forward contract with Selton Industries to buy 100,000 barrels of oil at $160 per barrel in December 2014.Selton's cost of production of the heating oil is $120 per barrel.
Required:
Determine the economic impact of the transaction to Selton (the seller of the heating oil)at the market price levels indicated in the table below,with and without the hedge.
$$\begin{array} { | r | c | c | c | c | } \hline \begin{array} { c } \text { Market Price } \\\text { per Barrel }\end{array} & \begin{array} { c } \text { Forward Price } \\\text { per Bushel }\end{array} & \begin{array} { c } \text { Unhedged } \\\text { Market Gain/ } \\\text { (Loss) }\end{array} & \begin{array} { c } \text { Economic Gain } \\/ \text { (Loss)on } \\\text { Forward }\end{array} & \begin{array} { c } \text { Economic } \\\text { Income with } \\\text { Hedge }\end{array} \\\hline \$ 180 & & & & \\\hline 170 & & & & \\\hline 160 & & & & \\\hline 150 & & & & \\\hline 140 & & & & \\\hline\end{array}$$