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?

Question

Quizplus · Accepted Answer

To fully hedge its inventory, Southern Fuel should take a short position in futures contracts. The number of contracts needed is 756,000 gallons divided by 42,000 gallons per contract, which equals 18 contracts.

Southern Fuel Has an Inventory of 756,000 Gallons of Heating