Question

On May 1, the share price of Company Monash is $60 and its December futures price is $54.7. On July 1 the share price is changed to $64 and its December futures price is changed to $64. An investor entered into futures contracts on May 1 to hedge his/her purchase of the share of Company Monash on July 1. The investor closed out his/her position on July 1. What is the effective price (after taking account of hedging) paid by the investor?

Answer 1

The information given includes:

1. Share price as on May 1 = $60; December Futures price = $54.7
2. Share price on July 1 = $64; December futures price = $64
3. It is also given that the investor entered into contract on May 1
4. Investor closed out his/ her position on July 1

Computation of gain or loss on futures

The gain or loss on futures can be computed using the given formula:

Changed futures price on a particular date	XXX
Less: Initial futures price	(XXX)
Gain or loss on Futures	XXX

Changed futures price on a particular date	64
Less: Initial futures price	54.7
Gain on Futures	9.3

Computation of effective price paid by the company

Spot price as on July 1	64
Less: Gain on futures	(9.3)
Effective price paid by the company	54.7

Note: The effective price paid can be computed in this method also:

Futures price as on May 1	54.7
Add: Basis as on July 1 (Spot price - Futures price)	0
Effective price paid by the company	54.7