Question

Assume that futures contracts have zero initial margins and no daily margin calls. That is, you pay nothing or get nothing when you enter a position in the futures contracts. You pay the entire futures price when you accept delivery of the underlying asset. You get the entire futures price when you make delivery of the underlying asset. Lastly, you pay your entire loss or get your entire profit on your futures position when you close the position with an offsetting trade. QUESTION 1 (8 points, one point per section) There is a futures contract calling for delivery of one ounce of gold three months from today. The current futures price is $1,250 per ounce. You established a LONG position in one futures contract at the futures price of $1,250: a) What is your cash flow when you establish your position? b) You hold the position until delivery day. What do you have to do on the delivery day? c) You close the position two days later at a futures price of $1,270 per ounce. What is your gain or loss on the position? d) You close the position two days later at a futures price of $1,220 per ounce. What is your gain or loss on the position? You established a SHORT position in one futures contract at the futures price of $1,250: e) What is your cash flow when you establish your position? f) You hold the position until delivery day. What do you have to do on the delivery day? g) You close the position two days later at a futures price of $1,270 per ounce. What is your gain or loss on the position? h) You close the position two days later at a futures price of $1,220 per ounce. What is your gain or loss on the position?

Answer 1

1]

a]

Cash flow when you establish position = $0 (this is because contracts have zero initial margins)

b]

On delivery day, you have to take delivery of 1 ounce of gold at the price of $1,250

c]

As it is a long position, an increase in the futures price will result in a profit, and a decrease in the futures price will result in a loss.

Gain = $1,270 - $1,250 = $20

d]

As it is a long position, an increase in the futures price will result in a profit, and a decrease in the futures price will result in a loss.

Loss = $1,250 - $1,220 = $30

2]

a]

Cash flow when you establish position = $0 (this is because contracts have zero initial margins)

b]

On delivery day, you have to deliver 1 ounce of gold at the price of $1,250

c]

As it is a short position, an decrease in the futures price will result in a profit, and an increase in the futures price will result in a loss.

Loss = $1,270 - $1,250 = $20

d]

As it is a short position, an decrease in the futures price will result in a profit, and an increase in the futures price will result in a loss.

Gain = $1,250 - $1,220 = $30