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 is the current period change in time value that would be recognized in earnings as of 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 is the current period change in time value that would be recognized in earnings as of 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. In September, this would have been $110,000 [100,000 x (85.00 - 83.50)].
 11eb11de_9257_edb4_ad38_79d3eeb88d6b_TB2014_00

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