Question

On March 1 a commodity's spot price is $60 and its August futures price is $59. On July 1 the spot price is $64 and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking account of hedging) paid by the company? a. $55.75 b. $61.20 c. $59.50 d. $46.50

Answer 1

The correct answer is $59.50.

Step-by-step explanation:

According to the scenario, the computation of the given data are as follows:

Gain on future price = After future price - before future price

$63.50 - $59

= $4.50

So, we can calculate the effective price paid by the company by using following formula:

Effective price paid = Spot price in July - Gain on future price

= $64 - $4.50

= $59.50