A. Ignoring taxes, what will Specialty’s profits be if oil pricesÂ in one year are as low as $100 or as high as $140, assuming that the firm does not enter into the forward contract?
B. If the firm were to enter into forward contract, demonstrate how this would be effectively lock in the firm’s cost of fuel today, thus hedging the risk of fluctuating crude oil prices on the firm’s profits for the next year.
A. Ignoring taxes, what will specialty’s profits be if oil prices in one year are as low as $100 or as high as $140, assuming that the firm does not enter into forward contract? Round to the nearest dollar.
Price of Oil/ bbl Unhedged Annual Profits