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.
$$\begin{array} { | r | c | c | c | c | }
\hline \begin{array} { c }
\text { Market Price } \
\text { per Barrel }
\end{array} & \begin{array} { c }
\text { Forward Price } \
\text { per Bushel }
\end{array} & \begin{array} { c }
\text { Unhedged } \
\text { Market Gain/ } \
\text { (Loss) }
\end{array} & \begin{array} { c }
\text { Economic Gain } \
/ \text { (Loss)on } \
\text { Forward }
\end{array} & \begin{array} { c }
\text { Economic } \
\text { Income with } \
\text { Hedge }
\end{array} \
\hline \$ 180 & & & & \
\hline 170 & & & & \
\hline 160 & & & & \
\hline 150 & & & & \
\hline 140 & & & & \
\hline
\end{array}$$

Question

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.
 $$\begin{array} { | r | c | c | c | c | } 
\hline \begin{array} { c } 
\text { Market Price } \
\text { per Barrel }
\end{array} & \begin{array} { c } 
\text { Forward Price } \
\text { per Bushel }
\end{array} & \begin{array} { c } 
\text { Unhedged } \
\text { Market Gain/ } \
\text { (Loss) }
\end{array} & \begin{array} { c } 
\text { Economic Gain } \
/ \text { (Loss)on } \
\text { Forward }
\end{array} & \begin{array} { c } 
\text { Economic } \
\text { Income with } \
\text { Hedge }
\end{array} \
\hline \$ 180 & & & & \
\hline 170 & & & & \
\hline 160 & & & & \
\hline 150 & & & & \
\hline 140 & & & & \
\hline
\end{array}$$

Quizplus · Accepted Answer

The Answer of 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.
 $$\begin{array} { | r | c | c | c | c | } 
\hline \begin{array} { c } 
\text { Market Price } \
\text { per Barrel }
\end{array} & \begin{array} { c } 
\text { Forward Price } \
\text { per Bushel }
\end{array} & \begin{array} { c } 
\text { Unhedged } \
\text { Market Gain/ } \
\text { (Loss) }
\end{array} & \begin{array} { c } 
\text { Economic Gain } \
/ \text { (Loss)on } \
\text { Forward }
\end{array} & \begin{array} { c } 
\text { Economic } \
\text { Income with } \
\text { Hedge }
\end{array} \
\hline \$ 180 & & & & \
\hline 170 & & & & \
\hline 160 & & & & \
\hline 150 & & & & \
\hline 140 & & & & \
\hline
\end{array}$$

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