Question

Help Save & Exit Submit In March, with the spot price of wheat at $5.75 per bushel, Hollywood Bakery longs 100 July wheat futures contracts (5,000 bushels each) on the CBOE at a futures price of $5.90 per bushel. In June, Hollywood Bakery closes out its futures contracts when the futures price is $5.80 per bushel. What is Hollywood Bakery's gain (or loss) on the futures contracts? 15 Multiple Choice A gain of $50,000 A gain of $25,000 A loss of $25,000 A loss of $50.000 None of the options are correct. Next Mc Graw 15 of 15 < Prev

Answer 1

Correct option is "D" -A loss of $ 50000

Loss On future contract = [Spot price in future -Future price]*number of contracts *lot size

                = [5.80 - 5.90 ]*100 *5000

                   = -.10 *100*5000

                    = $ - 50000

Long of future contract means Buy of contract .so when price is higher than Future price ,There will be a profit and when price is lower than Future price ,there will be a loss.

Say for example ,You buy a future contract at $ 100 .so when price is increased to $ 120 ,there will be profit of $ 20 since the product that is worth $ 120 is purchased at 100

or

You buy a future contract at $ 100 .so when price is Decreased to $ 80 ,there will be loss of $ 20 since the product that is worth $ 80 is purchased at 100