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CMA Final · Strategic Financial Management · Forwards and Futures

Tara Mills holds 10,000 kg of cotton and sells 4 futures contracts of 2,500 kg each at ₹120 per kg. At expiry, the spot price is ₹112 per kg and the futures settle at ₹112. Ignoring margin costs, what is the effective realised amount per kg for Tara Mills from the spot sale plus futures?

The effective realised price is ₹120 per kg. The spot sale yields ₹112 and the short futures position gains ₹8 per kg as prices fell, so the hedge locks in the original futures price when the basis is zero at expiry.

  1. A₹112
  2. B₹120Correct
  3. C₹128
  4. D₹104

Explanation

Spot sale gives 112 per kg. Short futures gain (120 - 112) = ₹8 per kg. Total = 112 + 8 = ₹120 per kg, which is the locked-in price. Option ₹128 wrongly adds the gain twice as if the futures were long.

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