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.

b. Go long March futures and short May futures.

c. Go long May futures and short March futures.

d. Go long March futures.

Answer 1

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

Explanation:

Settlement of future contracts takes place by entering into the opposite transaction on the settlement date.

Here, the spread is expected to widen, which indicates that the March futures price will decline by settlement date and the May futures price will increase by settlement date.

For erning profits one has to buy cheaper and sell dearer.

Hence, with regard to March futures one should go short and reverse [buy] it on settlement date, by which time the price would have gone down.

In he case of May futures the opposite action will result in gain.