The Futures Price of a Commodity Such as Wheat Is

question 23

Essay

The futures price of a commodity such as wheat is $2.50 a bushel. Futures contracts are for 10,000 bushels, and the margin requirement is $2,500 a contract. The maintenance market requirement is $1,000. A speculator expects the price of the commodity to rise and enters into a contract to buy wheat.
a. How much must the speculator initially remit?
b. If the futures price rises to $2.60, what is the profit and return on the position?
c. If the futures price declines to $2.47, what is the loss on the position?
d. If the futures price rises to $2.70, what must the speculator do?
e. If the futures price continues to decline to $2.32, how much does the speculator have in the account?

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Definitions:

Arithmetic Average

A statistical measure of central tendency calculated by summing a set of values and dividing by the number of values in the set.

Geometric Average

A method of calculating the average rate of return that accounts for compounding, commonly used for investment portfolios.

Total Returns

Total returns include all sources of investment return including capital gains, dividends, and interest, measured over a specific time period.

Variance

A statistical measure of the dispersion of data points in a data series around the mean.