Consider an airline company planning to purchase 21,000,000 barrels of jet fuel in February 2021. One jet fuel futures contract allows one buy or sell 42,000 gallons of jet fuel. The company wishes to hedge against a possible increase in jet fuel prices and creates a long position in February jet fuel futures contracts for 21,000,000 barrels. The current futures price of a February contract is $1.33 per gallon.

Suppose in February 2021, the company will choose to take profit from its futures position and not take physical possession of the jet fuel prescribed in its futures positions. In other words, the company will either receive gains or pay off losses according to the prevailing market price of jet fuel at the time.

Suppose also that the company will also purchase the 21,000,000 barrels of jet fuels in the open market at the prevailing market price.

If jet fuel price in February 2021 is $1.80, what are the effective costs of the 21,000,000 barrels of jet fuels that it purchases? Effective cost here refers to the combination of the payoff from its futures position and the actual payment made on the purchase of the jet fuel.