Question
In: Finance
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
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