The T-Shirt Factory Purchased 12 Futures Contracts on Cotton at a Quoted

question 33

Multiple Choice

The T-Shirt Factory purchased 12 futures contracts on cotton at a quoted price of 55.50 as a hedge against its inventory needs. At the time it actually needed the cotton, the spot price was 56.10. 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)$90
• B)$560
• C)$1,280
• D)$2,400
• E)$3,600

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Definitions:

Operating Influence

A term not commonly used in standard financial or business lexicon and might be confused or conflated with Operating Income, which refers to the profit realized from a business's core operations.

Common Stock

A type of ownership in a corporation represented by shares, entitling holders to vote on corporate matters and receive dividends.

Trading Investments

Securities that a company holds for the purpose of selling them in the short term to profit from price differences.

Valuation Allowance

A reserve established against deferred tax assets that may not be realized, ensuring that the asset's carrying amount does not exceed its likely realization.