A Company Will Buy 1000 Units of a Certain Commodity

question 10

Multiple Choice

A company will buy 1000 units of a certain commodity in one year.It decides to hedge 80% of its exposure using futures contracts.Spot price and futures price are currently $100 and $90.The one year futures price of the commodity is $90.If the spot price and the futures price in one year turn out to be $112 and $110 respectively,what is the average price paid for the commodity?

• A)$92
• B)$96
• C)$102
• D)$106

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Definitions:

Sarbanes-Oxley Act

U.S. legislation enacted in 2002 to protect investors from fraudulent financial reporting by corporations, requiring strict adherence to accounting standards and the establishment of internal controls.

Internal Control

Internal control encompasses the policies and procedures implemented by a business to safeguard its assets, ensure accurate financial reporting, promote accountability, and prevent fraud.

Price-Earnings Ratio

A valuation metric for stocks, calculated as the market price per share divided by the earnings per share (EPS), indicating the dollar amount an investor can expect to invest in a company to receive one dollar of that company's earnings.

Price-Earnings Ratio

A valuation ratio of a company's current share price compared to its per-share earnings.