On August 1, an oil producer decided to hedge the fair value of its inventory by acquiring a futures contract to sell 100,000 barrels of oil on November 1 for $85.00 each.Price data follow: ?
$$\begin{array} { l r r }
& \text { Spot Price } & \text { Futures Price } \
\text { August 1 } & \$ 84.00 & \$ 85.00 \
\text { September 1 } & 82.80 & 83.50 \
\text { October 1 } & 82.20 & 82.40 \
\text { November 1 } & 81.00 & 81.00
\end{array}$$ What is the current period change in time value that would be recognized in earnings as of October 1?
A)-$260,000
B)-$110,000
C)-$50,000
D)-$60,000

Question

On August 1, an oil producer decided to hedge the fair value of its inventory by acquiring a futures contract to sell 100,000 barrels of oil on November 1 for $85.00 each.Price data follow: ?
$$\begin{array} { l r r } 
& \text { Spot Price } & \text { Futures Price } \
 \text { August 1 } & \$ 84.00 & \$ 85.00 \
\text { September 1 } & 82.80 & 83.50 \
\text { October 1 } & 82.20 & 82.40 \
\text { November 1 } & 81.00 & 81.00
\end{array}$$ What is the current period change in time value that would be recognized in earnings as of October 1?
A)-$260,000
B)-$110,000
C)-$50,000
D)-$60,000

Quizplus · Accepted Answer

The period change in time value can be calculated by subtracting the time value on August 1 from the time value on October 1. 
Time value on August 1 = $0 (since the futures contract was just acquired) 
Time value on October 1 can be calculated using the formula: 
Time value = (Futures price - Spot price) x Number of contracts x Barrels per contract 
Spot price on October 1 is not given, but we can assume it to be the current market price of oil, which is $80.00 per barrel. 
Time value on October 1 = ($85.00 - $80.00) x 100,000 x 1 = $500,000 
Period change in time value = $500,000 - $0 = $50,000. 
Therefore, the correct answer is C - $50,000.

On August 1, an Oil Producer Decided to Hedge the Fair