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

Question

Quizplus · Accepted Answer

The savings from hedging can be calculated by finding the difference between the hedged price and the spot price, then multiplying by the quantity. The difference in price is 56.10 - 55.50 = 0.60 cents per pound. Since each contract is for 50,000 pounds, the savings per contract is 0.60 * 50,000 = 30,000 cents, or $300. With 12 contracts, the total savings is 12 * $300 = $3,600.

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