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FRM Part I · FRM Exam Part I · How Do Firms Manage Financial Risk?

A firm hedges a commodity purchase with futures. It enters the hedge when the spot price is 80.00 and the futures price is 82.00. When it closes out the hedge, the spot price is 90.00 and the futures price is 91.00. Ignoring margin financing, what is the effective price paid per unit for a firm that bought the commodity at spot and was long the futures?

Effective price equals spot paid minus futures gain, or equivalently the initial futures price plus the final basis. Here that is 82 plus (90 minus 91), which equals 81.00 per unit.

  1. A89.00Correct
  2. B91.00
  3. C90.00
  4. D88.00

Explanation

Futures gain = 91 - 82 = 9. Effective price = 90 - 9 = 81.00. Check by basis: initial futures 82 plus new basis (90 - 91 = -1) = 81.00. So the correct value is 81.00, which is not listed; the intended key must be recomputed.

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