# 1. 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 through reverse trade. What is the effective price (after taking account of hedging) paid by the company?

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 through reverse trade. What is the effective price (after taking account of hedging) paid by the company?

Solution

On March 1, the Company takes a long Future Position by buying Futures at \$59.

### Save your time - order a paper!

Get your paper written from scratch within the tight deadline. Our service is a reliable solution to all your troubles. Place an order on any task and we will take care of it. You won’t have to worry about the quality and deadlines

Order Paper Now

On July 1,The Company closes its Future position at \$63.5 to hedge its Purchase of Commodity at \$64

Therefore Gain on Futures = 63.5- 59 = \$ 4.5

Cost paid by Company to buy Commodity on July 1 = Spot Rate = \$64.

Therefore, Effective Price (After taking account of Hedging) paid by the Company = 64 – 4.5 = \$ 59.5

Ans:Effective Price (After taking account of Hedging) paid by the Company = \$ 59.5