What is Mogul's effective cost per barrel if they hedge the risk by buying futures on 5600.0 barrels of oil?
Calculate Mogul's effective cost per barrel using futures contracts involves considering the number of barrels, futures price, spot price, and the hedging strategy. With the given data, let's calculate Mogul's effective cost per barrel step by step:
To calculate Mogul's effective cost per barrel, we need to:
1. Calculate the cost of the futures contract:
Cost of futures contract = Number of futures contracts * Futures price
Cost of futures contract = 5600.0 * $17.6 = $98,560
2. Calculate the gain/loss from the futures contract:
Gain/Loss = Number of futures contracts * (Spot price - Futures price)
Gain/Loss = 5600.0 * ($16.5 - $17.6) = 5600.0 * (-$1.1) = -$6,160
3. Calculate the effective cost per barrel:
Effective cost per barrel = (Cost of futures contract + Gain/Loss) / Total barrels purchased
Effective cost per barrel = ($98,560 - $6,160) / 8000 = $92,400 / 8000 = $11.55
Therefore, Mogul's effective cost per barrel is $11.55. Despite the answer options provided, the correct calculation derived $11.55 as the effective cost per barrel.
Understanding Mogul's Effective Cost Calculation:
Mogul's Hedging Strategy:
Mogul oil refinery plans to buy 8000 barrels of oil in 9 months. To manage the risk associated with fluctuating oil prices, Mogul decides to hedge by buying futures on 5600.0 barrels of oil at the current futures price of $17.6 per barrel.
Calculation Steps:
1. Calculate the Cost of the Futures Contract:
Mogul purchases 5600.0 barrels of oil futures contracts at $17.6 per barrel.
Cost of futures contract = 5600.0 * $17.6 = $98,560
2. Calculate the Gain/Loss from the Futures Contract:
The spot price of oil in 9 months is $16.5 per barrel.
Proceed to calculate the gain or loss from the futures contract based on the spot and futures prices.
Gain/Loss = 5600.0 * ($16.5 - $17.6) = 5600.0 * (-$1.1) = -$6,160
3. Calculate the Effective Cost Per Barrel:
Combine the total cost of the futures contract and the gain/loss to determine the effective cost per barrel.
Effective cost per barrel = ($98,560 - $6,160) / 8000 = $11.55
Conclusion:
By utilizing futures contracts for hedging, Mogul's effective cost per barrel for purchasing 8000 barrels of oil in 9 months is $11.55. This calculated amount represents the combined cost of the futures contract and the gain/loss incurred through the hedging strategy.
In conclusion, understanding how futures contracts impact effective cost calculations is crucial for businesses like Mogul to manage their procurement costs efficiently.