On April 1,2012,Button Industries Enters into an Agreement with Bows

question 12

Essay

On April 1,2012,Button Industries enters into an agreement with Bows Incorporated to lock in the price of cotton.Button agrees to purchase (and Bows agrees to sell)100,000 pounds of cotton at $1.19 per pound,six months from the date of agreement.On October 1,2012,the price of cotton is $1.17 per pound.The contract allows for net settlement.
Required:
Determine the net settlement on the forward contract.

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Definitions:

Fad Effect

A temporary period of high demand for a certain product or service, often without a basis in the product's qualities or utility.

Liquidity Effect

The impact that changes in the supply of money have on interest rates, typically where an increase in money supply leads to a decrease in interest rates.

Neglected-firm Effect

The phenomenon where lesser-known or less-followed stocks generate higher abnormal returns than their well-followed counterparts.

Excess Returns

The return on an investment that exceeds a benchmark or risk-free rate, indicating the additional compensation for taking on risk.