FRM Part I · FRM Exam Part I · Using Futures for Hedging
A firm will buy an asset in three months and goes long a futures contract. Today the futures price is 50.00. When the hedge is lifted, the spot price is 52.00 and the futures price is 51.20. What is the effective purchase price?
The effective purchase price is 50.80. The firm pays 52.00 in the spot market but earns 1.20 on the long futures position, which equals the initial futures price of 50.00 plus the final basis of 0.80.
- A50.80Correct
- B51.20
- C52.00
- D50.00
Explanation
Futures gain for a long = 51.20 - 50.00 = 1.20. Effective cost = spot paid - gain = 52.00 - 1.20 = 50.80. Check: initial futures 50.00 plus final basis (52.00 - 51.20 = 0.80) = 50.80. Choosing 52.00 ignores the futures gain.
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