Financial Risk Manager Part 1

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Explanation:

Since the company has a long position in futures contracts and the futures contract price has decreased over the period of the hedge, the company has incurred a loss on its exposure in the futures contracts.

Note the effective price (Net cost of asset when a long hedge is used) is given by:

\text{Net cost of asset when long hedge is used} = F_0 + (S_t - F_t) \\ = F_0 + b_t

Where

$F_0$ : Futures price at the time the hedge is initiated,
$F_t$ : Futures price at the time the hedge is closed,
$S_t$ : Spot price of the asset being hedged at the time the hedge is closed, and
$b_t = S_t - F_t =$ Basis at time $t$

So in this case we have: $F_0 = 2.45$ , $F_t = 2.42$ and $S_t = 2.30$ . Thus:

\text{Net cost of asset when long hedge is used} = 50,000 \left[2.45 + (2.30 - 2.42)\right] = 116,500

The loss on the futures contract = $(F_t - F_0) \times 50,000 = (2.42 - 2.45) \times 50,000 = -1,500$ , meaning a loss of €1,500.

Explanation:

Note the effective price (Net cost of asset when a long hedge is used) is given by:

\text{Net cost of asset when long hedge is used} = F_0 + (S_t - F_t) \\ = F_0 + b_t

Where

$F_0$ : Futures price at the time the hedge is initiated,
$F_t$ : Futures price at the time the hedge is closed,
$S_t$ : Spot price of the asset being hedged at the time the hedge is closed, and
$b_t = S_t - F_t =$ Basis at time $t$

So in this case we have: $F_0 = 2.45$ , $F_t = 2.42$ and $S_t = 2.30$ . Thus:

\text{Net cost of asset when long hedge is used} = 50,000 \left[2.45 + (2.30 - 2.42)\right] = 116,500

The loss on the futures contract = $(F_t - F_0) \times 50,000 = (2.42 - 2.45) \times 50,000 = -1,500$ , meaning a loss of €1,500.

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Q.644 A French carmaker expects to purchase 50,000 tons of copper at the end of April. The copper futures contracts on the Eurex Exchange are available for the delivery months of March, June, September, and December, and the size of one contract is for one ton of copper. The company took a long position in June contracts on March 1st at a futures price of 2.450 Euros per ton. If the futures price and spot price on the closing date are 2.42 and 2.30, respectively, then calculate the net cost in Euros and the gain or loss on the futures contract.

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Last updated: July 21, 2026 at 02:10

The net cost is €116,500, and the loss on the contract is €6,000.

The net cost is €121,000, and the loss on the contract is €6,000.

The net cost is €116,500, and the loss on the contract is €1,500.

The net cost is €121,000, and the loss on the contract is €7,500.