Question

C. on 01 august 2023, john and kate entered a forward contract, where kate goes long to buy some silver at a fixed price at the end of the year. john is counterparty to the transaction. they both agree to trade 50 ounces of silver at the forward price of $1000 per ounce on 30 december 2023. i. at the delivery date the spot price of gold is $1100, calculate the profit or loss to both john and kate. [10 marks

Answer 1

John makes a profit of $5000 and Kate incurs a loss of $5000 when comparing the spot price of silver at the delivery date with the forward price agreed upon in the contract.

Step-by-step explanation:

Profit or loss for both John and Kate can be calculated by comparing the spot price of silver at the delivery date with the forward price agreed upon in the contract.

For John, who is the counterparty to the transaction, the profit or loss can be calculated using the formula: Profit/Loss = (Spot Price - Forward Price) * Quantity.

For Kate, who goes long to buy silver, the profit or loss can be calculated using the formula: Profit/Loss = (Forward Price - Spot Price) * Quantity.

In this case, the spot price of silver on the delivery date is $1100, and the forward price agreed upon in the contract is $1000 per ounce. The quantity traded is 50 ounces.

For John: Profit/Loss = ($1100 - $1000) * 50 = $5000 profit.

For Kate: Profit/Loss = ($1000 - $1100) * 50 = $5000 loss.