You are short 25 gasoline futures contracts, established at an initial settle pr

ID: 2811951 • Letter: Y

Question

You are short 25 gasoline futures contracts, established at an initial settle price of $2.50 per gallon, where each contract represents 42,000 gallons. Over the subsequent four trading days, gasoline settles at $2.47, $2.51, $2.53, and $2.56, respectively.

Calculate the profit or loss for each trading day. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)

Compute your total profit or loss at the end of the trading period. (Do not round intermediate calculations. Input your answer as a positive value.)

Explanation / Answer

Profit/Loss

Day 1

$ 31,500

Day 2

- $ 42,000

Day 3

-$ 21,000

Day 4

-$ 31,500

Total loss at the end of trading period is 63,000

Explanation:

On selling the contract, cash outflow is:

Cash out flow = No. of contacts x gallons per contract x price per gallons

= 25 x 42,000 x $ 2.50 = $ 2,625,000

At the end of day 1, value of account is:

Account value day, 1 = 25 x 42,000 x $ 2.47 = $ 2,593,500

For a sort position, a gain is obtained when price declines and loss on price increasing.

Profit/loss on day 1 = Initial cash out flow - Ending value day 1

= $ 2,625,000 - $ 2,593,500 = $ 31,500

At the end of day 2, value of account is:

Account value day, 2 = 25 x 42,000 x $ 2.51 = $ 2,635,500

Profit/loss on day 2 = Ending value day 2 - Ending value day 1

= $ 2,593,500 - 2,635,500 = - $ 42,000

At the end of day 3, value of account is:

Account value day, 3 = 25 x 42,000 x $ 2.53 = $ 2,656,500

Profit/loss on day 3 = Ending value day 3 - Ending value day 2

= 2,635,500 - $ 2,656,500 = - $ 21,000

At the end of day 4, value of account is:

Account value day, 4 = 25 x 42,000 x $ 2.56 = $ 2,688,000

Profit/loss on day 4 = Ending value day 4 - Ending value day 3

= 2,635,500 - $ 2,688,000 = - $ 31,500

Total profit = $ 2,625,000 - $ 2,688,000 = - $ 63,000