77) CPT 3200 This particular company needs to purchase 10,000 oil barels on June

Question

77) CPT 3200 This particular company needs to purchase 10,000 oil barels on June 2012. To hedge the position they enter in a long positions in 10 oil futures contracts ((each representing 1,000 barrels of oil (per contract))) with delivery on July 2012. The futures price they entered this current positions is $99.50 per barrel at this time. On June 18, 2012 the company enters a short position in 10 oil futures contracts with delivery on July 2012 to close on their currently existing long positions. At this time they also purchase 10,000 oil barrels in the current spot market. The spot market price on June 18 is $102.25 per oil barrel. The futures price for delivery in July 2012 on June 18 is $102.00.

a) How much money ($) was made/lost as a result of the futures positions?

b) How much was paid by the company for each barrel taking into account hedging?

c) Why was the effective price paid different than the futures price of $99.50 per barrel when the company opened the long futures positions?

Explanation / Answer

Ans a) SInce the company has taken the long position and price increased in futures so company will be benefitted by this long position by 10*1000*(102 - 99.5) = $25,000

Ans b) Company paid $99.75(99.5 +102.25 - 102) for each barrel taking into account hedging.

Ans c) Effective price paid was different because company closed its future position before the expiry and paid $.25 extra per barrel.

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