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FRM Part I · FRM Exam Part I · Using Futures for Hedging

A company will sell an asset in two months and shorts a futures contract. Today the spot price is 98.50 and the futures price is 100.20. When the hedge is lifted, the spot price is 103.40 and the futures price is 104.10. What is the effective price received by the company, ignoring margin financing costs?

The effective price is 99.50.

  1. A102.70Correct
  2. B103.40
  3. C104.10
  4. D105.10

Explanation

Effective price = final spot + futures gain. Futures gain for a short = 100.20 - 104.10 = -3.90. So 103.40 - 3.90 = 99.50. Check: initial futures 100.20 plus final basis (103.40 - 104.10 = -0.70) gives 99.50. Hence the correct value is 99.50, which must be reflected below.

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