The Specialty Chemical Company operates a crude oil refinerylocated in New Iberia, LA.The company refines crude oil and sellsthe by-products to companies that make plastic bottles and jugs.The firm is currently planning for its refining needs for one yearhense. Specifically, the firms analysts estimates that this companywill need to purchase 1 million barrels of crude oil at the end ofthe current year to provide the feed stock for its refining needsfor the coming year. The 1 million barrels of crude will beconverted into by-products at an average cost of $20 per barrelthat the company expects to sell for $175 million, or $175 perbarrel of crude used. The current spot price of oil is $120 perbarrel and this company has been offered a forward contract by itsinvestment banker to purchase the needed oil for a delivery pricein one year of $125 per barrel.
A. ignoring taxes, what will this company’s profits be if oilprices in one year are as low as $105 or as high as $145, assumingthe firm does not enter into the forward contract? round answer tonearest decimal.
B. If the firm were to enter into the forward contract, demonstratehow this would effectively lock in the firm’s cost of fuel today,thus hedging the risk of fluctuating crude oil prices on the firm’sprofits for next year by:Â
B. Round to nearest dollar the following:
Price of Oil/BBL Unhedged Annual Profits
$105 $____
$110 $____
$115 $____
$120 $____
$125 $____
$130 $____
$135 $____
$140 $____
$145 $____
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