Question

1. True or False: the forward price is the price the forward contract buyer needs to pay to the seller to enter the contract. Explain.

2. A trader enters into a SHORT position in a cotton futures contract when the futures price is 50 cents per pound yesterday. The contract is for the delivery of 50,000 pounds. How much does the trader gain or lose totally if the futures price at the end of today is

• 48.20 cents per pound;
• 51.30 cents per pound?

Answer 1

1. The statement is False the truth is forward price is price at which buyer agrees to buy and seller agreees to sell and underlying assets on specific future date and this contract buyer and seller both have right and obligations both

2.

As we have taken the short position we expect the price to be decline hence if price goes down we will be in a profit if it goes up we will have loss:-

Profit/Loss = (yesterday's Future Price-Today's Future Price)* contract size

If today's price is 48.20 cents

Profit = (50-48.20)*50000

=1.8*50000

= 90000 cents

That means profit= $900

if today's price = 51.30 cents

Profit= (50-51.30)*50000

= -65000(Loss) cents

That means loss of $650