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 one of the statements below is not wrong?

　　I. A strip hedge tends to have wider bid-ask spreads as compared to a stack & roll hedge.

　　II. A strip hedge increases transaction costs owing to active trading each month.

　　A.  I only.

　　B.  II only.

　　C.  I and II.

　　D.  Neither.

　　Answer: A

　　Explanation:

　　A strip hedge involves hedging a stream of obligation by offsetting each individual obligation with a futures contract matching the maturity and quantity of the obligation. A strip hedge tends to have lower liquidity and wider bid-ask spreads owing to longer maturity contracts.

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