On August 1, an oil producer decided to hedge the fair value of its inventory by acquiring a futures contract to sell 100,000 barrels of oil on November 1 for $85.00 each. Price data follow: What was the fair value of the contract on October 1?

Question

On August 1, an oil producer decided to hedge the fair value of its inventory by acquiring a futures contract to sell 100,000 barrels of oil on November 1 for $85.00 each. Price data follow:  What was the fair value of the contract on October 1?

Quizplus · Accepted Answer

The fair value of the futures contract is the difference between the futures price of the contract at the outset and the current future price multiplied by the number of units.
100,000 barrels x (85.00 - 82.40) = $260,000

On August 1, an Oil Producer Decided to Hedge the Fair