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Question 5 a) Oil "Swaps", "Options", and "Futures" are all examples of derivative contracts. Evaluate...

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Question 5 a) Oil "Swaps", "Options", and "Futures" are all examples of derivative contracts. Evaluate the differences between these derivative contracts and explain in detail how each of these can be used in price-risk management (10 marks) b) Refiners can often manage their price risk on processing by entering a crack spread, which effectively "locks in the refiners' profits by agreeing selling prices for the products they produce in advance, and netting off the cost of the crude oil required to produce those products. Construct a Crack Spread trade for an American refiner, using a 5-3-2 crack spread, with the following data: Date Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 WTI Futures S/bbl 56.27 55.52 55.70 56.19 56.80 57.44 Gasoline $/US Gallon 1.5025 1.4959 1.4793 1.4687 1.4558 1.4631 Heating Oil $/US Gallon 1.6078 1.6225 1.6456 1.6649 1.6559 1.5382 Sketch the Crack Spread graph and clearly justify what the likely market conditions behind the shape of the curve. (15 marks)

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