Question

A commodities speculator purchases a 1,000-bushel wheat futures contract at $0.50 per bushel. At expiration, the settlement price is $0.45 per bushel. This individual:

A) Incurs a loss
B) Incurs a gain
C) Breaks even
D) Receives a dividend

Answer 1

The commodities speculator incurs a loss because the settlement price at expiration is lower than the purchase price of the futures contract.

Step-by-step explanation:

A commodities speculator who purchases a 1,000-bushel wheat futures contract at $0.50 per bushel and then sees the settlement price at expiration fall to $0.45 per bushel, incurs a loss. Since the speculator contracted to buy the wheat at a higher price than the market price at expiration, they lose money on the difference. In this case, the loss per bushel is $0.05 ($0.50 - $0.45), and for 1,000 bushels, the total loss is $50 ($0.05 loss/bushel * 1,000 bushels).