Question

Assume a speculator bought a wheat future selling at $10,

putting down 20%. One month later the contract was sold for $11.
Absent brokerage fees, what is the speculator's annualized
return?

Answer 1

The speculator's annualized return on the wheat future, when purchasing at $10 with a 20% down payment and selling at $11 one month later, is 600%.

Step-by-step explanation:

The speculator bought a wheat future at $10 and paid 20% as margin, which is $2. The contract was later sold for $11, making a profit of $1 on the $2 investment. The annualized return is calculated by dividing the profit by the initial investment and then annualizing that figure:

Annualized return = (($1 / $2) * 100) * (12 months / 1 month)

Annualized return = (0.5 * 100) * (12 / 1)

Annualized return = 50% * 12

Annualized return = 600%

This calculation assumes the rest of the purchase was financed and the entire profit was made on the initial margin (the 20% downpayment).