A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its exposure using futures contracts. The spot price and the futures price are currently $100 and $90, respectively
The spot price and the futures price in one year turn out to be $112 and $110, respectively. What is the average price paid for the commodity?
A. $92
B. $96
C. $102
D. $106
B
On the 80% (hedged) part of the commodity purchase the price paid will 112?(110?90) or $92 . On the other 20% the price paid will be the spot price of $112 . The weighted average of the two prices is 0.8×92+0.2×112 or $96 .
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