Question

1- Considering a short position on a futures contract, the "futures payoff" is positive if

a) The spot price S is greater than the futures price F.

b) The spot price S is less than the futures price F.

c) The spot price S is equal to the futures price F.

2- The basis represents the difference between :

a) The spot price at maturity and the predetermined futures price

b) The average spot price and the predetermined futures price

c) The spot price at time zero and the predetermined futures price

Answer 1

The "futures payoff" would be positive only when the spot price S is less than the futures price F. Short position is a position which commits the seller to sell or deliver a product or item to the buyer at the price contracted on maturity. Hence it is clear that from the seller's perspective, the futures payoff would only be positive only when the person concerned would be able to sell the product or item at a price higher than the prevailing market rate. Hence option b) is correct.

Basis is considered to be the difference between the spot price at time zero and the predetermined future price. Hence option c) is the correct option.