In February, a company wanted to hedge the future purchase of crude oil some time in June or July by using August oil futures contracts. The August oil futures price was $72.00 per barrel. When the company decided to buy crude oil in July, the oil spot price was $79 and the August oil futures price was $74. Calculate the net cost of purchasing the oil with hedgingGroup of answer choices$81$72$77$79$74
Question
In February, a company wanted to hedge the future purchase of crude oil some time in June or July by using August oil futures contracts. The August oil futures price was 79 and the August oil futures price was 817774
Solution
To calculate the net cost of purchasing the oil with hedging, we need to consider both the change in the spot price and the change in the futures price.
Here's the calculation:
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Calculate the change in the futures price:
Change in futures price = Final futures price - Initial futures price Change in futures price = 72 Change in futures price = $2
Since the company was long the futures contract, it made a gain of $2 per barrel on the futures contract.
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Calculate the cost of purchasing the oil:
Cost of oil = Spot price Cost of oil = $79
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Calculate the net cost of purchasing the oil with hedging:
Net cost = Cost of oil - Gain on futures contract Net cost = 2 Net cost = $77
So, the net cost of purchasing the oil with hedging is $77 per barrel.
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