Southern Fuel has an inventory of 632,000 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 hedge the inventory fully, Southern Fuel needs to take a short position in the futures contracts on heating oil.

Number of futures contracts required = Inventory size / Contract size 
= 632,000 / 42,000 
= 15.05

Since the number of contracts is not a whole number, Southern Fuel should round down to the nearest whole number and take a short position in 15 futures contracts. Therefore, the correct choice is C, short on 15.

Southern Fuel Has an Inventory of 632,000 Gallons of Heating