Explain how MGRM's cash flows would have changed if the basis had increased (rather than fallen) and if oil prices had fallen (as they did)

What will be an ideal response?

If oil prices had fallen (as they did), then MGRM would have closed out its monthly mountain of futures contracts with losses and its yearly forward contracts with gains to cause net cash outflows. An increase in basis would have improved the profitability of MGRM's hedge because the company would have closed out its hedge in Year 1 at a spot price that was relatively higher than the futures price it would have to pay at the end of Year 2 . With a long hedge, any increase in basis increases the cash flows to the hedger.