Futures and options Petrochemi

Futures and options Petrochemical Parfum (PP) is concerned about a possible increase in the price of heavy fuel oil, which is one of its major inputs. Show how PP can use either options or futures contracts to protect itself against a rise in the price of crude oil. Show how the payoffs in each case would vary if the oil price were $70, $80, or $90 a barrel. What are the advantages and disadvantages for PP of using futures rather than options to reduce risk? Assume the current price of oil is $70 per barrel, the futures price is $80, and the option exercise price is $80.

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