Question

You buy a forward contract on gold. The contract is for 1,000 ounces of gold at a price of $1,271.10 an ounce and the current market price for gold is $1,269.80 per ounce. The contract expires in 6 months. The price at expiration for gold is $1325.65 per ounce. As the buyer of the gold, what was your profit or loss after taking delivery on the contract?

$1,300

$54,550

$55,200

$55,850

Answer 1

Solution:

In the case of a forward contract:          

a. If the spot price as on expiration date is below the forward price, then the seller will receive the difference as a payment from the buyer

a. If the spot price as on expiration date is more than the forward price, then the buyer will receive the difference as a payment from the seller

Since the spot price as on expiration date is more than the forward price, the profit of the contract at settlement to the buyer of this forward calculated as follows:

= Spot price at expiration date - Forward Price

As per the Information given in the question we have

Forward Price per ounce = F0 = $ 1,271.10

Spot price at expiration date per ounce = ST = $ 1,325.65

Thus as a buyer of gold, the profit per ounce = $ 1,325.65 - $ 1,271.10 = $ 54.55

No. of ounce in the contract = 1000

Therefore the total amount of profit after taking delivery on the contract

= No. of ounces in the contract * Profit per ounce in the contract

= 1000 * $ 54.55

= $ 54,550

Thus the Solution is Option 2 = $ 54,550