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FRM Part I · FRM Exam Part I · Commodity Forwards and Futures

A jewelry manufacturer will buy 5,000 ounces of silver in three months and hedges by going long silver futures today at 24.00 per ounce. Three months later, it buys silver in the spot market at 26.50 and closes out the futures at 26.20. What is the effective net price per ounce paid?

The effective price is 24.30 per ounce. The long futures position gains 2.20 per ounce, reducing the 26.50 spot cost to 24.30. This equals the initial futures price of 24.00 plus the closing basis of 0.30, so the hedge is not perfect.

  1. A24.30Correct
  2. B24.00
  3. C26.20
  4. D26.50

Explanation

Futures gain = 26.20 - 24.00 = 2.20 per ounce. Net price = spot paid 26.50 - gain 2.20 = 24.30. Equivalently, the hedge price 24.00 plus the final basis of 0.30 (26.50 - 26.20). Choosing 24.00 ignores basis risk.

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