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On March 1 the price of oil is $60 and the July futures price is $59. On June 1 the price of oil is $64 and the July futures price is $63.50. A company entered into a futures contracts on March 1 to hedge the purchase of oil on June 1. It closed out its position on June 1. After taking account of the cost of hedging, what is the effective price paid by the company for the oil

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abiolataiwo2015

Answer:

$59.50

Explanation:

Calculation to determine the effective price paid by the company for the oil

Using this formula

Net price paid=Buy oil-Profit from futures

Let plug in the formula

Net price paid=$64-($63.50-$59)

Net price paid=$64-$4.50

Net price paid=$59.50

Therefore the effective price paid by the company for the oil will be $59.50

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