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Answer: The producer is concerned about the lack of availability of longer-dated futures contracts and the liquidity of longer-dated futures contracts.
## Explanation In a **stack and roll hedge**, the producer uses short-dated futures contracts and rolls them forward as they mature. This approach is typically chosen when: - **Longer-dated futures contracts are not available** for the required maturity period - **Longer-dated futures contracts lack sufficient liquidity** Both concerns are valid reasons for choosing a stack and roll hedge over a strip hedge. A strip hedge would use futures contracts with maturities matching each delivery date, but this requires the availability and liquidity of longer-dated contracts. **Key points:** - Stack and roll hedge addresses both availability AND liquidity issues - The producer is hedging against upward price surges by going long on futures - This strategy involves rolling over short-dated contracts to cover longer-term obligations - The correct answer must include BOTH concerns (lack of availability AND liquidity issues)
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An oil producer has an obligation under an agreement to supply 75,000 barrels of oil every month for one year at a fixed price. He wishes to hedge his liability to address the event of an upward surge in oil prices. The producer has opted for a stack and roll hedge rather than a strip hedge. Which of the following two statements are correct?
A
The producer is concerned about the liquidity of longer-dated futures contracts.
B
The producer is concerned about the lack of availability of longer-dated futures contracts.
C
The producer is concerned about the lack of availability of longer-dated futures contracts and the liquidity of longer-dated futures contracts.
D
The producer is concerned about the lack of availability of longer-dated futures contracts or the liquidity of longer-dated futures contracts.
E
The producer is concerned about the lack of availability of longer-dated futures contracts and the liquidity of longer-dated futures contracts, but not both.
F
The producer is concerned about the lack of availability of longer-dated futures contracts or the liquidity of longer-dated futures contracts, but not both.