Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used
ID: 2751238 • Letter: P
Question
Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter’s production of catalytic converters. It buys 3-month futures contracts for 10,000 ounces at a price of $1,590 per ounce.
Suppose the spot price of platinum falls to $1,470 in 3 months’ time. Does Phoenix have a profit or loss on the futures contract?
If the spot price of platinum increases to $1,770 after 3 months, does Phoenix have a profit or loss on the futures contract?
Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter’s production of catalytic converters. It buys 3-month futures contracts for 10,000 ounces at a price of $1,590 per ounce.
Explanation / Answer
a) Phoenix motors has a LOSS on the futures contract equal to $ 1,200,000 10000*(1590-1470) b-1) Since, future contract entered, cost of platinus was locked. Yes b-2) Total locked in cost $ 15,900,000 1590*10000 c) Phoenix motors has a PROFIT on the futures contract equal to $ 1,800,000 10000*(1770-1590) d) Total locked in cost $ 15,900,000 1590*10000