You're the purchasing manager for a large trucking company. You're planning for the December peak in deliveries. You estimate you'll need 100,000 gallons of diesel fuel for the month. Which of the following will hedge your risk of oil prices rising between now and December 1?
a) Enter into a physical delivery forward contract today to purchase 100,000 gallons of diesel oil on December 1 at $3.15/gallon
b) Enter into a physical delivery forward contract today to sell 100,000 gallons of diesel oil on December 1 at $3.15/gallon
c) Enter into a cash settled forward contract today to purchase 100,000 gallons of diesel oil on December 1 at $3.15/gallon
d) Enter into a cash settled forward contract today to sell 100,000 gallons of diesel oil on December 1 at $3.15/gallon
Ans: a) Enter into a physical delivery forward contract today to purchase 100,000 gallons of diesel oil on December 1 at $3.15/gallon
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