Question

On 15 Sep 20XX, the Oct Futures contract for Crude Oil dropped from $18.27 to -$37.63 per barrel. Suppose an European investor closed her 1,000 barrels of long position in the Crude Oil futures contract on 14 Sep at $18.27. With an exchange rate: 0.92 EUR for 1 USD, if the investor closed her positions on 15 Sep, she would:

a)   hold the futures contract that has fallen in value by EUR 51,428
b)   have lost EUR 51,428.00
c)   have to pay EUR51,428.00 and hold new futures contract priced at $37.63
d)   hold the futures contract that has fallen in value by EUR 16,800
e)   have lost EUR16,800 and hold new futures contract priced at $19.27

Answer 1

Decline in value = From 18.27 to -37.63 = 18.27 - (-37.63) = $ 55.90 per barrel

Hence, mark to market loss = $ 55.90 x EUR 0.92 / $ x 1,000 barrels = Euro 51,428.00

This is a mark to market loss and not and actual payout. Actual payout on future contracts occur on the day of expiry.

Hence, the correct answer is the first option i.e. option a) hold the futures contract that has fallen in value by EUR 51,428