Question

True or False

futures contract short seller can only gain money from her position if the futures price declines over time.

The current income received on a long futures position is generally positive, but small in comparison to the capital gain/loss of the contract itself.

Answer 1

1. Future contract short seller can only gain money from her position if the futures price declines over time.

TRUE

Explanation:

short selling is a strategy to make money on securities whose prices are expected to be falling in future.

let's say an investor thinks that the price of a stock "X" is very high (overvalue) at present and it may fall in future. So to gain profit he borrows "n" shares of stock "X" at current market price from his broker and sells these "n" shares at current market prices itself. The investore now buys the "n" share of the stocks after some time when it's price goes down and return the "n" shares of the stock to his broker and keeps the profit from decline in the price of share.

Profit from decline in price = (Selling price - buying price)x Number of shares.

So the investore receives profit if prices goes down but he will be in losses if price of the stock goes up.

2.  The current income received on a long futures position is generally positive, but small in comparison to the capital gain/loss of the contract itself.

FALSE

Explanation:

when an investore enters into a future contract to buy a security (stock, currency, commodity etc) with expactation that in future the price of security or underlaying assets of security will rise in value. when a investore (buyer) enters into a contract then he has to pay contract registration money (which is not refundable). Now after entering into contract if the price of security goes up the investore get profit but if the prices goes down then he can break the contract and hence the losses will be equal to the money that he paid to other party for enter into contarct.

Now max profit can be =unlimited ( as the price of security can go up to any value)