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FRM Part I · FRM Exam Part I · Futures Markets

A company hedges a commodity purchase by buying futures. The initial futures price is 84 and the final spot price is 90. At closing, the futures price is 91. What is the effective purchase price per unit, and what does it equal in terms of the basis?

The effective price is 83. It equals the initial futures price of 84 plus the final basis of minus 1 (spot 90 less futures 91), confirming that only the final basis, not the price level, remains as the hedger's risk.

  1. A83, equal to the initial futures price plus the final basisCorrect
  2. B90, equal to the final spot price
  3. C91, equal to the final futures price
  4. D84, equal to the initial futures price with no basis risk

Explanation

Effective price = S2 + F1 - F2 = 90 + 84 - 91 = 83. This equals F1 + b2 where the final basis b2 = S2 - F2 = -1, so 84 - 1 = 83. The 84 option would apply only if the final basis were zero; 90 ignores the futures gain of 7.

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