On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November 1 the price is $980 and the December futures price is $981. A producer of the commodity entered into a December futures contracts on March 1 to hedge the sale of the commodity on November 1. It closed out its position on November 1. What is the effective price (after taking account of hedging) received by the company for the commodity

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aquialaska aquialaska · Answer 1 · 2020-05-18T12:29:47+02:00

Answer:

$1,014

Explanation:

The computation of effective price received by the company for the commodity is shown below:-

Here for computing the Effective price received first we need to find out the profit on future contract which is here below:-

Profit on future contract = Futures prices of Nov 1 - Dec Future prices Dec

= $1015 - $981

= $34

Effective price received = November Price + Profit on future contract

= $980 + $34

= $1,014

abiolataiwo2015 abiolataiwo2015 · Answer 2 · 2021-12-31T12:59:24+01:00

The effective price (after taking account of hedging) received by the company for the commodity is $1,014.

First step

Future contract profit:

Future contract profit= $1015 - $981

Future contract profit= $34

Second step

Effective price :

Effective price = $980 + $34

Effective price= $1,014

Inconclusion the effective price (after taking account of hedging) received by the company for the commodity is $1,014.

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