Today you buy a December \'16 wheat futures contract at 548\'4. ( one contract i

Question

Today you buy a December '16 wheat futures contract at 548'4. ( one contract is for 5,000 bushels). You buy 10 contracts of the wheat futures.

a. Assume that the initial margin is 8%, what is your initial cash outflow to establish the position?

b. You close out you position in August when the December '16 wheat futures is trading at (i) 558'2 (ii) 542'6. What is your net dollar profit in either case?

c. What is your rate of return corresponding to the two possible prices shown in b?

d. Assume that the total transaction cost for the 10 contracts is $70 each way. Now re-compute your net $ profit and the rate of return corresponding to both prices shown in b?

Explanation / Answer

Answer :

Now we are in long position December '16 wheat futures contract at 548'4

One contract - 5000 bushels- 548'4

10 contracts - 50,000 bushels - 5484 ( 548'4 *10 contracts )

a) Initial margin is 8% = 5484*8%

= 438.72

b) In August if long position is closed then if i) Current price of wheat future is 558'2

Profit for 10 contracts = 5582-5484

= 98 $

ii ) If Current price of wheat future is 542'6

loss for 10 Contracts = 5426-5484

= (58 ) $

C) Rate of Return based on Intial Margin i) if price is 558'2 $ then for 10 Contracts = 98$/438.72 *100

= 22.337%

ii ) if price is 542'6 $ then for 10 Contracts = (58)$ / 438.72 *100

= (13.22)%

d) If we assume $ 70 as transaction cost for 10 contracts then Rate of return

as per price of b) i) = $ 98 - $ 70

= $ 28

Rate of return based on intial margin = $ 28/ 438.72 *100

= 6.38%

as per price of b) ii) Loss of $ 58 +$ 70 transaction cost = $ 128

Rate of return = [$ (58) + $ (70)] / 438.72 *100

= (29.175) %

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