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NISM Certifications · NISM-Series-XV: Research Analyst · Fundamental Analysis of Commodities

A cotton processor expects to buy 100 bales in three months and fears a price rise. Spot is Rs 55,000 per bale and the three-month futures is Rs 56,000. It buys 100 bales of futures. At expiry the spot is Rs 58,000 and futures converge to Rs 58,000. Ignoring costs, the effective purchase price per bale is:

The effective price is Rs 56,000 per bale. The long futures position gains Rs 2,000 per bale as it rises from 56,000 to 58,000, offsetting the higher spot purchase price of Rs 58,000. A perfect hedge with convergence locks in the original futures price.

  1. ARs 56,000Correct
  2. BRs 58,000
  3. CRs 55,000
  4. DRs 57,000

Explanation

Futures gain = 58,000 - 56,000 = Rs 2,000 per bale. Buying physical at Rs 58,000 and netting the gain gives 58,000 - 2,000 = Rs 56,000, the locked-in futures price. Rs 58,000 ignores the hedge; Rs 55,000 uses the old spot.

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