Sketch out your total cash proceeds (spot cash +/- profit on futures) in January assuming the...

Sketch out your total cash proceeds (spot cash +/- profit on futures) in January assuming the following 3 scenarios:

a. Spot price PT at delivery = your initial F0

b. Spot price PT at delivery = your initial F0 – $0.30

c. Spot price PT at delivery = your initial F0 + $0.30

Solutions

Expert Solution

Since the question doesn't mention if position in futures in long position or short position, we are assuming long position in Futures

Scenerio a. Spot price PT at delivery = your initial F0:

Gains on future = Spot at delivery - initial Future Price F0

Therefore Gains on future = initial Future Price F0 - initial Future Price F0

Therefore Gains on future = nil

Total Cash Proceeds = Spot Price at Delivery + Gains on future

Total Cash Proceeds = PT + 0

Total Cash Proceeds = PT

Scenerio b. Spot price PT at delivery = your initial F0 – $0.30

Gains on future = Spot at delivery - initial Future Price F0

Therefore Gains on future = initial Future Price F0 - $0.30 - initial Future Price F0

Therefore Gains on future = -$0.30

Total Cash Proceeds = Spot Price at Delivery + Gains on future

Total Cash Proceeds = PT - $0.30

Scenerio c. Spot price PT at delivery = your initial F0 + $0.30

Gains on future = Spot at delivery - initial Future Price F0

Therefore Gains on future = initial Future Price F0 + $0.30 - initial Future Price F0

Therefore Gains on future = $0.30

Total Cash Proceeds = Spot Price at Delivery + Gains on future

Total Cash Proceeds = PT + $0.30

jeff jeffy answered 1 year ago

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