However, once HSHO has entered into these contracts to deliver heating oil at a fixed price, HSHO is exposed to 'price risk' if the firm doesn't 'own' the oil or have a fixed-price contract to purchase heating oil from a refiner.

NOTE: In the following example we discuss hedging requirements for a single month, October. This analysis would be repeated for each of the monthly periods of the heating season for the amount of outstanding fixed-price contracts for that month.

1. Explain why HSHO is exposed to price risk in this case.

A) Because the price of heating oil changes when there are changes in either the supply of or demand for heating oil.
B) Because HSHO has offered its clients fixed-price sales contracts, and because it doesn't own the heating oil it has sold, the firm runs a risk that heating oil prices will rise.
C) Because it is the nature of being a merchant or middleman to be exposed to price risk.
D) Because heating oil distribution is a risky business.