On March 1 the price of a commodity is $1,000 and the December futures price is $1,015.On November 1 the price is $980 and the December futures price is $981.A producer of the commodity entered into a December futures contracts on March 1 to hedge the sale of the commodity on November 1.It closed out its position on November 1.What is the effective price (after taking account of hedging)received by the company for the commodity?
A) $1,016
B) $1,001
C) $981
D) $1,014

Question

Quizplus · Accepted Answer

The producer of the commodity takes a short futures position.The gain on the futures is 1015−981 or $34.The effective price realized is therefore 980+34 or $1014.This can also be calculated as the March 1 futures price (=1015)plus the November 1 basis (=−1).

On March 1 the Price of a Commodity Is $1,000