The Shirt Factory Purchased 10 Futures Contracts on Cotton at a Quoted

question 34

Multiple Choice

The Shirt Factory purchased 10 futures contracts on cotton at a quoted price of 71.14 as a hedge against its inventory needs.At the time it actually needed the cotton,the spot price was 71.56.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)$2,100
• E)$3,000

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Definitions:

Adverse Selection

A situation in which one party in a transaction has more information than the other, leading to an imbalance and potentially poor market outcomes, commonly seen in insurance markets.

Insurance

A financial product or agreement that provides compensation for specific losses or damages in return for payments made.

High Risk

Refers to situations or investments that have a high potential for loss or failure.

Average Premium

The mean amount paid for insurance coverage across a defined set of policies, reflecting the average cost to the insured.