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2. Consider a trader who opens a long futures position. The contract size is £62,500; the...

2. Consider a trader who opens a long futures position. The contract size is £62,500; the maturity is six months, and the settlement price is $1.60 = £1; At maturity, the price (spot rate) is $1.50 = £1. What is his payoff at maturity? (Answer: -£6250)

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Answer #1

Contract Size = £62,500

Trader enters into a long future position which has a maturity in six months. at settlement price of $1.60 = £1 , i.e., trader will buy in 6 months at settlement price.

Buy price as per settlement contract = £62,500 * $1.60/£1

= $ 100,000

At maturity, the price (spot rate) is $1.50 = £1

Buy price as per maturity Spot rate = £62,500 * $1.50/£1

= $ 93750

As, Trader purchased at higher price, loss to the trader = $100,000 - $93750

Loss   = $6250

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