23. An investor establishes a long position in a futures contract now (time t-0)
ID: 2807077 • Letter: 2
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23. An investor establishes a long position in a futures contract now (time t-0) and holds the position until maturity (time t . The sum of all daily settlements will be 0 A. Fo-Fr B. Fo-So; C.Fr-Fo; D. Fr-S 24. On January 1 you sold one April S&P; 500 Index futures contract at a futures price of 1,300. close your position. (The contract multiplier is 250.) A. $15,000; B. -$12,500; C$12,500; D. $15,000; E.$17,500 50 on February 1, your profit would beif you February If your Apri il futures price is 1,250 25, The spot price for gold is $1,550 per ounce. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should beper ounce. D. $1,577.89; E. $1,582.10 B. $1,557.89 C. $1,569.08; A. $1,524.99; $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions 26. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for Settle Day Monday $97.406.25 Tuesday $98,000.00 Wednesday $100.000.00 The cumulative rate of return on your investment after Wednesday is a A. 79.9% loss; B. 42.6% loss; C. 3.3% gain; D. 23.9% gain; E. 38.6% gainExplanation / Answer
(23) The daly settlement mechanism in the futures market ensures that daily losses and gains are debited and credited to respective accounts on a regular basis (daily) at the end of the day. If suppose a futures contract worth $100 is negotiated for potatoes between a buyer and seller, the day when the potato price moves down to $100 the seller gains $ 2 and the buyer losses $ 2 (as both are obligated to negotiate the contract at the futures contract price of $100. Hence, the seller gains and buyer loses). For the buyer the loss is immediately debited from his/her account and the seller gets the gain credited to his/her account also almost immediately. This daily adjustment of gain and loss is the futures contract daily settlement mechanism. These daily settlements in either direction cancel each other out more often than not and at maturity the difference between the then futures price and initial futures price is the sum of all daily settlements (This is because the price movement is tracked from the initial futures price and not the initial spot price).
Therefore, the correct answer is Option (C) which is F(t) - F(0).
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