Suppose the price of gold is $440 per ounce in May and you feel: the price is go

Question

Suppose the price of gold is $440 per ounce in May and you feel: the price is going to move down so you sell an October gold contract for $460 per ounce. Calculate the profit or loss from these transactions if the contracts are liquidated in September when the October gold future settle price is 1) $400 per ounce, 2) $500 per ounce.

A) Case 1: 4,000 gain; Case 2: 6,000 gain
B) Case 1: 4,000 gain; Case 2: 6,000 loss
C) Case 1: 6,000 gain; Case 2: 4,000 loss
D) Case 1: 6,000 loss; Case 2: 4,000 gain

Explanation / Answer

Number of contracts = 100

Case1: Gain = (460 - 400) x 100 = $6,000

Case2: Loss = (500 - 460) x 100 = $4,000

Thus, Option C.

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