Question

March what futures are trading at $4.20 a bushel and May wheat futures are trading at $4.35 a bushel. You expect the spread between May and March futures prices to widen. To speculate on this view, you would

Select one:

a. Go long May futures and short March futures.

b. Go long March futures.

c. Go long March futures and short May futures.

d. Go long May futures.

Answer 1

Answer: [a] Go long May futures and short March futures.

Explanation:

Future contracts are settled by entering into the opposite transaction on the due date. As the spread are expected to widen, the March futures will go down by settlement date and the May futures will go up by settlement date.

Further, as profit arises when futures are bought low and sold high,

For March futures it is better to go short and square it up when the prices go down on settlement date.

Fof May futures it is better to go long and square it up when the price go up on settlement date.