The T-Shirt Factory Purchased Seven Futures Contracts on Cotton at a Quoted

question 30

Multiple Choice

The T-Shirt Factory purchased seven futures contracts on cotton at a quoted price of 63.70 as a hedge against its inventory needs. At the time it actually needed the cotton, the spot price was 64.50. Cotton futures are based on 50,000 pounds and quoted in cents per pound. How much did the Shirt Factory save by hedging cotton?

• A)$40
• B)$400
• C)$2,600
• D)$2,400
• E)$2,800

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Definitions:

Annuity

A financial product that pays out a fixed stream of payments to an individual, typically used as an income stream for retirees.

Rate Of Return

The elevation or devaluation of an investment’s worth over an established period, profiled as a percentage of the original investment cost.

Monthly Payments

Regular payments made over a period, often in the context of loans or leases, where the total amount is divided into equal monthly installments.

Future Value

The equivalent value of an asset or money at a future date, which equals a certain present-day amount.