Question

SPECULATION. July 2018 Cocoa was trading for at $1582 per metric ton on April 25th. Today it is trading at $1700. The contract size for Cocoa is 10 metric tons and on May 2nd is trading Give both per ton and total values for a and b.

a. If you undertook a position as a short speculator on 4/25 and offset your position on 5/2 for a July 2018 Cocoa futures contract, what is your gain or loss? Show calculations.

b.If you undertook instead position as a short speculator on 4/25 and offset your position on 5/2 for a July 2018 Cococa futures contract, what is your gain or loss? Show calculations.

Answer 1

Given:

• April 4th Future Price (F₀) = $1582
• May 2nd Future Price (F_t) = $1700

Formula:

• Short position gain\loss = ( F₀- F_t) * contract size
• Long position gain\loss = (F_t - F₀) * contract size

If the resultant value is -ve then its a loss for the corresponding position & +ve means gain for the corresponding position

Rules:

• Short future position gains if Prices fall
• Long future position gains if Prices rise

Calculation:

a) Short position = ( F₀- F_t) * contract size

= ( 1582 - 1700 ) * 10

= - $ 1,180 (Loss)

Short position loss = - $ 1,180

Short position loss (per ton) = - $ 1,180/10 = -$ 118 per ton

b) I believe the question is incorrect (part a & part b looks similar from the perspective of the short speculator). Neverthless I'll project the gain\loss for the long position for this part, just in case if required for you.

Long position = (F_t - F₀) * contract size

= ( 1700 - 1582 ) * 10

= $ 1,180 (gain)

Long position Gain = $ 1,180

Long position Gain (per ton) = $ 1,180/10 = $ 118 per ton

Comparing the above results from both positions you can understand that whatever is the Seller's loss is the Buyer gain, this is called Zero sum game.

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