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

A firm will sell 100,000 barrels of crude oil in three months and hedges by selling 100 futures contracts of 1,000 barrels each. It also considers a protective put with strike USD 80. Futures price at inception is USD 82. At maturity, spot is USD 70 and the futures price converges to USD 70 with no basis risk. A put with strike USD 80 was purchased for USD 2.50 per barrel (ignore financing). Which statement is correct regarding the net price per barrel realized?

The short futures position gains USD 12 per barrel, lifting the USD 70 spot sale to a net USD 82. The put pays 80 per barrel at exercise, but after the USD 2.50 premium the net realized price is USD 77.50.

  1. AFutures hedge realizes USD 82; put hedge realizes USD 77.50Correct
  2. BFutures hedge realizes USD 70; put hedge realizes USD 80
  3. CFutures hedge realizes USD 82; put hedge realizes USD 80
  4. DFutures hedge realizes USD 82; put hedge realizes USD 72.50

Explanation

Futures: sell at spot 70 plus gain of 82 - 70 = 12, giving 82. Put: exercise at 80 and subtract premium 2.50, giving 77.50. Option 3 ignores the premium. Option 2 ignores the futures gain.

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