Question

A bus company believes that its diesel fuel expenses might rise in the coming year and wants to create a hedge against the increase. The current price of diesel fuel is $3.50/gallon, and the company uses 10,000 gallons per month. The company purchased a futures contract for 10,000 gallons of diesel at $3.50/gallon to be delivered in six months. The price of the contract was $250.00. In six months, the spot price of diesel fuel is $3.85/gallon. The bus company accepted delivery of the contract commodity. What was the economic substance of the futures contract

Answer 1

Answer:

The contract produced savings of $3,250

Explanation:

Calculation to determine the economic substance of the futures contract

First step is to calculate the Increased in price of diesel fuel

Increase in diesel fuel price=$3.50/gallon to $3.85/gallon

Increase in diesel fuel price=.35/gallon

Second step is to calculate the amount saved by the firm

Amount saved=$0.35 × 10,000 gallons

Amount saved=$3,500

Now let determine the economic substance of the futures contract

Futures contract economic substance=$3,500 − $250

Futures contract economic substance=$3,250

Therefore the economic substance of the futures contract is $3,250