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22 September, 05:47

5. A trader executes a spread trade in which it buys 10,000 bushes of cash wheat for $4.30 per bushel and sells two futures contracts at a price of $4.60. After three months, the trader sells the cash corn at a price of $6.15 per bushels and buys two futures contracts at a price of $6.13. Storage costs are 1 cent per month. The size of the wheat futures contract is 5000 bushels. Ignore the time value of money for these calculations. Calculate the total gains or losses?

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  1. 22 September, 06:00
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    Total Gain = $2900

    Explanation:

    There are two parts of trade - one in cash and one in future.

    Cash trade:

    Purchase of 10,000 bushes at $4.30

    Total value = 10000*4.30 = 43,000

    Storage cost is 1 cent per month and 10,000 bushes are sold after 3 months Hence,

    Total storage cost = 10,000 * 0.01 * 3 = $300

    Selling price of the corn bushes = $6.15 per bushes

    Total value = 10,000*6.15 = 61,500

    Total profit in cash trade = 61,500 - 43,000 - $300 = $18,200

    Future trade:

    10,000 bushes (2 contract of 5000 quantity) is sold at $4.60

    Total value = 10,000*4.6 = 46,000

    After 3 months 10,000 bushes of future contact are purchased at $6.13

    Total but value = 10000*6.13 = 61,300

    Total loss in future trade = sell value - buy value

    = $46,000 - $61,300 = - 15,300

    Total profit in trade = profit from cash + profit from future trade

    = 18,200 - 15,300 = 2,900

    Total gain = $2,900
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