In: Finance
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
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