FRM Part I · FRM Exam Part I · Commodity Forwards and Futures
A refiner agrees to buy 10,000 barrels of crude oil on a forward contract at USD 80 per barrel. At maturity the spot price is USD 84.50. What is the refiner's payoff on the forward, ignoring financing costs?
The refiner gains USD 45,000. A long forward pays the spot price at maturity minus the agreed price, which is 84.50 minus 80, or 4.50 per barrel. Multiplying by 10,000 barrels gives USD 45,000. The refiner buys at 80 something worth 84.50.
- AUSD 45,000 gainCorrect
- BUSD 45,000 loss
- CUSD 4,500 gain
- DUSD 845,000 gain
Explanation
The long forward payoff is (84.50 - 80) x 10,000 = 4.50 x 10,000 = USD 45,000 gain. The loss option has the wrong sign, and the USD 4,500 option omits the 10,000 contract size by miscalculating the multiple.
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