FRM Part I · FRM Exam Part I · Using Futures for Hedging
On 1 March a company sells 50,000 barrels of crude oil it will deliver in June. It hedges by shorting June futures at USD 80.00 per barrel. When it closes the position and sells the oil, the spot price is USD 76.50 and the futures price is USD 77.20. What is the effective net price per barrel realized?
The effective price is USD 79.30 per barrel. The short futures gain USD 2.80 (80.00 minus 77.20), which adds to the USD 76.50 spot sale price. Equivalently, the initial futures price of 80.00 plus the final basis of minus 0.70 gives 79.30.
- AUSD 76.50
- BUSD 79.30Correct
- CUSD 80.00
- DUSD 80.70
Explanation
Futures gain per barrel = 80.00 - 77.20 = 2.80. Net price = spot 76.50 + 2.80 = 79.30. Check: initial futures 80.00 plus basis (76.50 - 77.20 = -0.70) = 79.30. USD 80.00 would be the result only if the basis were zero.
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