EViews Reading - Unit 4 (Hull 8ed Ch3 p56-59) - 56 CHAPTER...

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This can also be written as the initial futures price plus the final basis: 0 : 7800 þ ð± 0 : 0050 Þ ¼ 0 : 7750 The total amount received by the company for the 50 million yen is 50 ² 0 : 00775 million dollars, or $387,500. Example 3.2 It is June 8 and a company knows that it will need to purchase 20,000 barrels of crude oil at some time in October or November. Oil futures contracts are currently traded for delivery every month on the NYMEX division of the CME Group and the contract size is 1,000 barrels. The company therefore decides to use the December contract for hedging and takes a long position in 20 December con- tracts. The futures price on June 8 is $68.00 per barrel. The company finds that it is ready to purchase the crude oil on November 10. It therefore closes out its futures contract on that date. The spot price and futures price on November 10 are $70.00 per barrel and $69.10 per barrel. The gain on the futures contract is 69 : 10 ± 68 : 00 ¼ $1 : 10 per barrel. The basis when the contract is closed out is 70 : 00 ± 69 : 10 ¼ $0 : 90 per barrel. The effective price paid (in dollars per barrel) is the final spot price less the gain on the futures, or 70 : 00 ± 1 : 10 ¼ 68 : 90 This can also be calculated as the initial futures price plus the final basis, 68 : 00 þ 0 : 90 ¼ 68 : 90 The total price paid is 68 : 90 ² 20,000 ¼ $1,378,000. 3.4 CROSS HEDGING In Examples 3.1 and 3.2, the asset underlying the futures contract was the same as the asset whose price is being hedged. Cross hedging occurs when the two assets are different. Consider, for example, an airline that is concerned about the future price of jet fuel. Because jet fuel futures are not actively traded, it might choose to use heating oil futures contracts to hedge its exposure.

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