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

A farmer shorts futures at 250 to hedge a crop to be sold in two months. When the hedge is closed, the spot price is 238 and the futures price is 243. Ignoring margin financing, what effective price does the farmer receive per unit?

The farmer receives 245 per unit. The futures short gains 7 (250 minus 243) and the crop sells at 238, giving 245. Equivalently, it is the initial futures price of 250 plus the final basis of minus 5.

  1. A245Correct
  2. B243
  3. C238
  4. D233

Explanation

Effective price = final spot + futures gain = 238 + (250 - 243) = 245. This equals the initial futures price 250 plus the final basis (238 - 243 = -5). Using 243 or 238 ignores the gain or the basis; 233 subtracts the gain.

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