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120

A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its exposure using futures contracts. The spot price and the futures price are currently $100 and $90, respectively. If the spot price and the futures price in one year turn out to be $112 and $110, respectively. What is the average price paid for the commodity?

A.$92

B.$96

C.$102

D.$106

A.$92

B.$96

C.$102

D.$106

Answer: B

On the 80% (hedged) part of the commodity purchase the price paid will 112−(110−90) or $92. On the other 20% the price paid will be the spot price of $112. The weighted average of the two prices is 0.8×92+0.2×112 or $96.

On the 80% (hedged) part of the commodity purchase the price paid will 112−(110−90) or $92. On the other 20% the price paid will be the spot price of $112. The weighted average of the two prices is 0.8×92+0.2×112 or $96.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015