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On March 1 the price of a commodity is $1,000 and the December futures price this commodity is $1,015. On November 1 the spot price of the commodity is $980 and the December futures price is $981. A producer of the commodity entered a December futures contracts on March 1 to hedge the sale of the commodity on November 1. The producer closed out the position on November 1. What is the effective price (after taking account of hedging) received by the producer?

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abiolataiwo2015

Answer:

$1,014

Explanation:

Calculation to determine the effective price (after taking account of hedging) received by the producer

Using this formula

Effective price=Future price+(Spot price-Future price)

Let plug in the formula

Effective price=$1,015+($980+$981)

Effective price=$1,015+(-$1)

Effective price=$1,014

Therefore the effective price (after taking account of hedging) received by the producer is $1,014

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