A trader enters into a short cotton futures contract when the futures price is 50 cents per pound. The contract is for the delivery of 50,000 pounds. How much does the trader gain or lose if the cotton price at the end of the contract is (a) 48.20 cents per pound and (b) 51.30 cents per pound?

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A trader enters into a short cotton futures contract when the futures price is 50 cents per pound. The contract is for the delivery of 50,000 pounds. How much does the trader gain or lose if the cotton price at the end of the contract is (a) 48.20 cents per pound and (b) 51.30 cents per pound?

EXPERT ANSWER

a. The profit or loss is computed as shown below:

= (Selling price – price at end of contract) x 50,000

= (0.50 – 0.4820) x 50,000

= 900

b. The profit or loss is computed as shown below:

= (Selling price – price at end of contract) x 50,000

= (0.50 – 0.5130) x 50,000

= – 650