Question

Suppose on Monday June 1, you long and I short the futures contract on 1000 units of commodity, for December delivery. We enter the positions when the futures price is $15 per unit. We are required to post margins equal to 12% of the contract amount. On Tuesday June 2, the December contract settles at $15.75. Between Monday and Tuesday, my return will be what percentage?

a. -4.2%
b. 50%
c. -42%
d. 5%

Answer 1

Answer: -42%

Step-by-step explanation:

Based on the scenario in the question, the initial investment will be:

= 15 × 1000 × 12%

= 15 × 1000 × 0.12

= $1,800

We then calculate the return. This will be:

=[(15 - 15.75) × 1,000]/1,800

= -750/1,800

= -0.4166666667

Return = -42%