Question

Suppose a company takes a long position in 20 December oil futures contracts on June 8 when the futures price is $58. It closes out its position on November 10. The spot price and futures price at this time are $65 and $62. The company is hedging 20,000 barrels, and uses a hedge ratio of 0.8. Each contract is for 1,000 bbl. What is the gain on the futures position?

Answer 1

The gain on the futures position

= (Futures price on closing date – Futures price on initial purchase date) * (contract size* hedge ratio)

Where,

Futures price on closing date of future contract on November 10 = $62 per barrel

Futures price on initial purchase date of future contract on June 8 = $58 per barrel

Contract size = 20,000 barrels

Hedge ratio = 0.8

Therefore,

The gain on the futures position = ($62 - $58) *(20,000 *0.8)

= $4 *16,000 = $64,000

Therefore gain on the future position is $64,000