A company will buy 1000 units of a certain commodity in one year.It decides to hedge 80% of its exposure using futures contracts.The spot price and the futures price are currently $100 and $90,respectively.The spot price and the futures price in one year turn out to be $112 and $110,respectively.What is the average price paid for the commodity?
A) $92
B) $96
C) $102
D) $106

Question

Quizplus · Accepted Answer

On the 80% (hedged)part of the commodity purchase the price paid will 112−(110−90)or $92.On the other 20% the price paid will be the spot price of $112.The weighted average of the two prices is 0.8×92+0.2×112 or $96.

A Company Will Buy 1000 Units of a Certain Commodity