Final answer:
To find the payoff from the wheat futures contracts, subtract the initial investment from the value at maturity, then multiply by the total number of bushels in the contract. The payoff would be negative since the price dropped from $2.81 to $2.21 per bushel.
Step-by-step explanation:
The student asks a question about calculating the payoff from a futures contract transaction involving wheat. To calculate the payoff, you need to find the difference between the buying price and the selling price and then multiply by the quantity involved in the contracts.
You initially buy 15 futures contracts at a price of $2.81 per bushel, with each contract covering 5,000 bushels. This means an initial investment of $2.81 per bushel x 5,000 bushels x 15 contracts. On the maturity date, if the price is at $2.21 per bushel, the value of the wheat at maturity is $2.21 x 5,000 x 15. The payoff is found by subtracting the initial value from the value at maturity, multiplying that difference by the total number of bushels (5,000 per contract x 15 contracts).
In this case:
- Initial value = $2.81 x 5,000 x 15
- Value at maturity = $2.21 x 5,000 x 15
- Payoff = (Value at maturity - Initial value) x (Total number of bushels)
The payoff would be negative, indicating a loss on the investment, since the selling price at maturity is lower than the buying price.