You own 10,000 barrels of crude oil that you plan to deliver in 3 months. You enter into a futures contract for the 10,000 barrels at a future price of 65. The spot price in 3 months is 70. What’s your net revenue from selling this oil?
a) 650,000
b) 700,000
c) 50,000
d)-50,000
e)10,000
The correct answer and explanation is:
The correct answer is a) 650,000.
To calculate the net revenue, first, let’s break down the two components involved in this transaction:
- Revenue from Futures Contract:
You enter into a futures contract for 10,000 barrels at a future price of 65. This means that, regardless of the spot price in 3 months, you have locked in a sale price of 65 per barrel.
The total revenue from the futures contract would be:
10,000 barrels×65 per barrel=650,00010,000 \text{ barrels} \times 65 \text{ per barrel} = 650,000. - Revenue from Spot Price:
In 3 months, the spot price is 70 per barrel. If you were to sell the oil at the current market price (spot price), your revenue would be:
10,000 barrels×70 per barrel=700,00010,000 \text{ barrels} \times 70 \text{ per barrel} = 700,000. - Net Revenue Impact from the Futures Position:
In a futures contract, you’ve agreed to sell at 65, but the market price is 70. This means that you would have been able to sell at a higher price (70) without the contract. The difference between the futures price and the spot price is:
70−65=5 per barrel70 – 65 = 5 \text{ per barrel}.
Since you have 10,000 barrels, the total opportunity loss from the futures contract is:
10,000×5=50,00010,000 \times 5 = 50,000.
So, your net revenue from this transaction would still be the total from the futures contract, which is 650,000. Even though you could have earned an extra 50,000 by selling at the spot price, your agreed price is locked at 65 per barrel.
Thus, your net revenue is 650,000.