Forward and Future Contract

Water Cooler
1

Given today’s geopolitical and economic headlines and since Options is my favorites topic I’ve got a scenario for you all

Current oil price ( June 19, 2025) : $75 /barrel
Required date : December 19, 2025: ( 6 months from now)
Quantity needed: 1,000 barrels
Here is the question
Do I lock in $75 now in a forward contract (hedge)?
Or do I speculate that prices will rise and agree to buy at $85?
Since we are all financiers in here, I’d love to hear your thoughts.
What would you do hedge or speculate? Let’s have some fun!

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2

ChatGPT is writing this up for me, but this is how I see it:

Scenario Summary:

Date Current Spot Price Forward Offer (Speculation) Quantity Decision
June 19, 2025 $75/barrel $85/barrel (speculative buy) 1,000 barrels Hedge or Speculate?

1. Hedge ($75 Forward Contract)

  • Lock in certainty: Total cost = $75,000

  • Pros:

    • Budget certainty
    • Protection from price spikes
    • Smart if your margin is sensitive to oil prices

  • Cons:

    • No upside if prices fall below $75
    • Could miss cheaper spot prices in Dec

2. Speculate ($85 Agreement)

  • Bet that oil will rise above $85

  • Total cost: $85,000

  • Pros:

    • Could be a win if spot in Dec > $90 (e.g., geopolitical shock)
    • Flexibility if you’re using it as a hedge against another position

  • Cons:

    • Overpay if price stays flat or drops
    • You’re already out of the money by $10/barrel on day one

3. The Real Question: Where’s Oil Going?

Let’s consider a few angles:

Viewpoint Insight
Macro Global slowdown = lower demand = price cap. But OPEC could cut supply.
Seasonal Winter demand could bump prices. But the U.S. has high inventory.
Geopolitical risk Middle East flare-up = upside risk. Stable = downside/stable prices.
Inflation/FX Strong USD = cheaper oil globally; weaker USD could push price higher.

Unless you have a clear thesis that oil will be above $90, agreeing to buy at $85 is speculative and already implies a premium over market.

Final Thought: What Would I Do?

  • If you’re an operator (e.g., airline, manufacturer): Hedge. Lock in $75. You don’t get paid to guess prices. You get paid to run margin.
  • If you’re a trader with edge/alpha: Speculate, but only if you have reason to believe $85 is cheap (e.g., inside macro view or supply disruption).

TL;DR

  • Risk-averse or budget-focused? Hedge.
  • Confident oil will spike above $90? Speculate.
  • Me? I’d hedge. Lock in the margin. Sleep well.

How would you play it?

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