Calculate Mogul's Effective Oil Price Per Barrel
What is Mogul's effective price of oil per barrel?
To calculate Mogul's effective price of oil per barrel, we need to consider the hedging arrangement using the futures contracts. Given: Mogul oil company sells 2000 barrels of oil. The current oil futures price is $23.75 per barrel. In 7 months, the spot price of oil is $22.25, and the futures price is $24.55 per barrel. Since Mogul hedges the risk by selling futures on 2000 barrels of oil, let's calculate the gains or losses from the futures contracts. Initial futures contract value = Number of barrels * Futures price = 2000 * $23.75 = $47,500 Final futures contract value = Number of barrels * Futures price = 2000 * $24.55 = $49,100 Gain or loss from futures contracts = Final futures contract value - Initial futures contract value = $49,100 - $47,500 = $1,600 (gain) Since the spot price of oil is lower than the futures price, Mogul benefits from the hedging strategy and gains $1,600 from the futures contracts. Now let's calculate Mogul's effective price of oil per barrel. Effective price per barrel = (Total revenue from oil sales + Gain from futures contracts) / Number of barrels Total revenue from oil sales = Number of barrels * Spot price = 2000 * $22.25 = $44,500 Effective price per barrel = ($44,500 + $1,600) / 2000 = $46,100 / 2000 = $23.05 Therefore, Mogul's effective price of oil per barrel is $23.05.