in layman’s terms as i understand this: - 7 barrels of crude can produce 4 barrels of gasoline and 3 barrels of heating oil. Now if it takes 1 month to produce the products, which one do we go long and which do we go short? just a bit unclear on that part. appreaciate your time on this one.
It doesn’t really have to do with time. It is basically just an imblance between the imputs (crude) and the outputs (gas and heating oil). If crude is underpriced relative to what it can produce you go long oil and short gas and heating oll and wait for the two to come back to equilibrium. If the outputs are cheap relatiive to crude, you go long gas and heaing oil and short crude and wait for equlibrium. Always long the cheap and short the overpriced.
level3aspirant Wrote: ------------------------------------------------------- > in layman’s terms as i understand this: > - 7 barrels of crude can produce 4 barrels of > gasoline and 3 barrels of heating oil. > > Now if it takes 1 month to produce the products, > which one do we go long and which do we go short? > just a bit unclear on that part. > > appreaciate your time on this one. I think in the question you’re referring to you buy oil for one month delivery. It then takes one month to produce gasoline and heating oil. You lock in the 2 month gasoline/heating oil price so when you are done producing you’ve locked in your arbitrage profit. Your arb. prices are the 1 month oil price and the 2 month gasoline/heating oil prices. As mwvt9 says though, I think there are times when you can sell oil and buy the others to lock in the arb. I agree it’s not always based on time, but in the specific question I think you’re referring to it gives you a time component.
My bad L3A. I agree with everything that LPoulin says above.
This is totally out of context. this kind of crack stuff is mostly for refiners like valero to lock in production profit. so long crude and short gasoline or heating oil.