Question

Finance  question

Marking to Market. Suppose that in the 5 days following a industry sale of August wheat futures at a futures price of $5.83, the futures price is:

Day	1	2	3	4	5
Price	$6.20	$6.45	$6.30	$6.50	$6.70

At the end of day 5, the industry decides to quit wheat farming and buys back his futures contract. What payments are made between the industry and the exchange on:

1. Day 1?
2. Day 2?
3. Day 3?
4. Day 4?
5. Day 5?

What is the total payment over the 5 days? Would the total payment be any different if the contract was not marked to market the contract size is 3,00 bushels, so the industry who sells a wheat futures contract realizes the following cash flows on each contract:

ANS:

	Futures Price	Change in Futures Price	Cash Flow per Contract
Day 1
Day 2
Day 3
Day 4
Day 5
Total

Answer 1

1. Total Payment over 5 days and on each day
DAY	FUTURE PRICE	CHANGE IN VALUE OF FUTURE PRICE	CONTRACT SIZE	CASH FLOW IN EACH DAY	CUMULATIVE CASH FLOW	ACCOUNT BALANCE
A	B	C	D	E = C*D	F	G
0	$        5.83						300 x 5.83	$       1,749.00
1	$        6.20	0.37	(6.20-5.83)	300	$              111.00	$           111.00	1749 + 111	$       1,860.00
2	$        6.45	0.25	(6.45-6.20)	300	$                 75.00	$           186.00	1860 + 75	$       1,935.00
3	$        6.30	-0.15	(6.30-6.45)	300	$              (45.00)	$           141.00	1935 + (45)	$       1,890.00
4	$        6.50	0.2	(6.50-6.30)	300	$                 60.00	$           201.00	1890 + 60	$       1,950.00
5	$        6.70	0.2	(6.70-6.50)	300	$                 60.00	$           261.00	1950 +60	$       2,010.00
				Total Cash Flow	$              261.00

2. Would the total payment be any different if the contract was not marked to market?
	No
	- the total payment would not be different, he would still get the difference in expiry price i.e.6.70 and contracted price i.e.5.83 for 300 bushels which would be…
	=	300*(6.7-5.83)
	=	261