A rice trader has planned to sell 22,000 kgs. of rice after 3 months from now. The spot price of the rice is ₹60 per kg and 3 months future on the same is trading at ₹59 per kg. Size of the contract is 1,000 kg. The pric

Initial Hedge (3 months ago): Quantity to hedge = 22,000 kg Number of contracts sold = 22 (22,000 kg / 1,000 kg per contract) Future price at which contracts were sold = ₹59 per kg Value of futures sold = 22,000 kg × ₹59/kg = ₹12,98,000 After 3 months: Spot price = ₹57 per kg Future contract price = ₹58 per kg Actions taken after 3 months: Sell rice in the spot market: The trader sells 22,000 kg of rice at the prevailing spot price. Amount realized from spot sale = 22,000 kg × ₹57/kg = ₹12,54,000 Close out futures position: The trader had sold futures contracts. To close the position, he must buy back the same number of futures contracts at the current futures price. Amount paid to buy back futures = 22,000 kg × ₹58/kg = ₹12,76,000 Gain/Loss on futures position = (Value of futures sold) - (Value of futures bought back) Gain/Loss = ₹12,98,000 - ₹12,76,000 = ₹22,000 (Gain) Effective Realized Price: Total amount realized = Amount from spot sale + Gain on futures position Total amount realized = ₹12,54,000 + ₹22,000 = ₹12,76,000 Effective realized price per kg = Total amount realized / Quantity sold Effective realized price = ₹12,76,000 / 22,000 kg = ₹58 per kg