A Milling Company Buys a Futures Contract That Requires It

question 22

Multiple Choice

A milling company buys a futures contract that requires it to take delivery of 5,000 bushels of wheat at a price of $6.75 per bushel.Next day the price of the future is $6.80.The miller:

• A) must pay an extra $0.05 a bushel into its margin account.
• B) can withdraw $0.05 from its margin account.
• C) does not need to do anything until the contract matures.
• D) can't say without knowing what happened to the spot price.

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Definitions:

Create Money

The process by which central banks or monetary authorities increase the money supply.

Deposit Account

A deposit account is a bank account that allows the holder to deposit and withdraw money, often earning interest, including savings accounts, checking accounts, and other transaction accounts.

Liabilities

Financial obligations or debts that a company or individual owes to others, which must be paid back in the future.

Government Securities

Financial instruments issued by the government to borrow money from the public.