You speculate in crude oil futures. Last month, you purchased ten January futures contracts at a quoted price of 99.91. These contracts are based on 1,000 barrels and quoted in dollars per barrel. Assume the actual price per barrel is $60.20 in January. How much did you gain or lose by hedging your position

Loss of $397,100

Explanation:

The price in future contract is $99.91 per barrel, and actual price is $60.20

The loss per barrel  = $99.91 - $60.20 = $39.71

Total loss = 10 contracts * 1000 barrels * loss of $39.71 per barrels =

= 10*1000*$39.71 = $397,100

The amount of loss is $397,100 by hedging the position.

Explanation:

This can be calculated using the following equation:

Profit or loss = Number of contract × 1,000 × (Actual price per barrel – Quoted future price)

Since;

Number of contract = 10

Actual price per barrel = $60.20

Quoted future price = 99.91

By substituting the values into the equation above, we have:

Profit or loss = 10 × 1,000 × ($60.20 – $99.91)

                     = 10,000 × ( – 39.71)

Profit or loss = – $397,100

Since the figure is negative, the amount of loss is $397,100 by hedging the position.

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