Question

A trader enters into a short cotton futures contract when the futures price is 50 cents per pound. The contract is for the delivery of 50,000 pounds. How much does the trader gain or lose if the cotton price at the end of the contract is (a) 48.20 cents per pound; (b) 51.30 cents per pound

Answer 1

Answer:

a. Total Gain=0.018*50,000=$900

b.  Total Loss=0.013*50,000=$650

Explanation:

a. if the price per pound at end of the contract is 48.20 and since the trader has enter into contract to sell the cotton at the price of 50 cents per pound, therefore in this case he is earning a gain of $0.018(0.50-0.4820) per pound of cotton and total gain is given as follows:

Total Gain=0.018*50,000=$900

a. if the price per pound at end of the contract is 51.30 cents and since the trader has enter into contract to sell the cotton at the price of 50 cents per pound, therefore in this case he is suffering a loss of $0.013(0.5130-0.50) per pound of cotton and total gain is given as follows:

Total Loss=0.013*50,000=$650