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

A firm shorts futures at 98.50 to hedge a commodity sale. At close-out the spot price is 95.00 and the futures price is 96.20. What effective price does the firm realize, ignoring margin financing?

The firm realizes 97.30. It sells the commodity at 95.00 and gains 2.30 on the short futures (98.50 minus 96.20). Equivalently, it gets the initial futures price plus the final basis, 98.50 minus 1.20. The basis weakened, so the hedge did not lock in 98.50.

  1. A97.30Correct
  2. B98.50
  3. C95.00
  4. D96.20

Explanation

Effective price = spot sale price + futures gain = 95.00 + (98.50 - 96.20) = 95.00 + 2.30 = 97.30. Alternatively, initial futures price plus final basis: 98.50 + (95.00 - 96.20) = 97.30. 98.50 ignores basis change, and 95.00 ignores futures gain.

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