On March 1 the spot price of a commodity is $20.00 and the July futures price...

On March 1 the spot price of a commodity is $20.00 and the July futures price is $18.75. On June 1 the spot price is $24.10 and the July futures price is $23.50. A company entered into a futures contracts on March 1 to hedge the purchase of the commodity on June 1. It closed out its position on June 1. What is the effective price paid by the company for the commodity?

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Expert Solution

Solution

The user of the commodity takes a long futures position. The gain on the futures is 23.50−18.75 = $4.75.

The effective paid realized is therefore 24.1−4.75 = $19.35

This can also be calculated as the March 1 futures price (=18.75) + the basis on July 1 (=0.60)

jeff jeffy answered 2 years ago

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