Problem 3.23

A trader purchased 20 futures contracts in June to hedge an exposure to the price of silver. (Note: each futures contract is on 5,000 ounces of silver.)

When the contract was entered, the spot price of silver was $23.50, and the basis was $0.20 per ounce. When the hedge was closed out in October, the spot price of silver was $24.20, and the basis was $0.30 per ounce.

What was the all-in cost for the trader above with a long position who purchased 100,000 of silver on the spot market when the futures position was closed? (Disregard the effect of the daily settlement on the overall cash flow.)

The trader intended to secure the price of silver at the time when the futures trade was opened in June. Why was the all-in price for the trader in October different from the spot price in June?