A company will buy 100 units of a certain commodity in one year.

The spot price and the futures price are currently $50 and $45, respectively.

At the end of one year, the spot price and the futures price turn out to be $56 and $55, respectively.

Consider the following statements.

I. If the company were to leave its exposure unhedged, it would pay $5,500 to buy the commodity at the end of one year.

II. If the company were to hedge 85% of its exposure, it would effectively pay $5,250 to buy the commodity at the end of one year.

Which of the following is correct?

a.

Statement I is incorrect, Statement II is correct.

b.

Statements I and II are correct.

c.

Statements I and II are incorrect.

d.

Statement I is correct, Statement II is incorrect.

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