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 three-month futures contracts for 10,000 ounces at a price of $1,250 per ounce.

a. Suppose the spot price of platinum falls to $1,100 in three months’ time. Does Phoenix have a profit or loss on the futures contract? Has it locked in the cost of purchasing the platinum it needs?

b. How do your answers change if the spot price of platinum increases to $1,400 after three months?AppendixLO1

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Commodity Magnoosium Frozen quiche Spot Price Futures Price $2,550 per ton $2,728.50 per ton $.50 per pound $.514 per pound Nevada Hydro 8s of 2002 77 Establishment Industries Costaguanan pulgas (currency) common stock Cheap white wine 78.39 9,300 pulgas $1 $95 6,900 pulgas $1 $97.54 $12,500 per 10,000-gal. tank $14,200 per 10,000-gal. tank Comments Monthly storage cost = monthly convenience yield Six months' storage costs $.10 per pound; six months' convenience yield = $.05 per pound. 4% semiannual coupon payment is due just before futures contract expires. Costaguanan interest rate is 95% per year. Establishment pays dividends of $2 per quarter. Next dividend is paid two months from now. Six months' convenience yield = $250 per tank. Your company has surplus storage and can store 50,000 gallons at no cost. TABLE 26.4 Spot and six-month futures prices for selected commodities and securities. See Problem 19.