There is a futures contract for the purchase of 100 bushels of wheat at $2.50 per bushel. At the end of the day when the market price of wheat increases to $3.00 per bushel:
A) the buyer (long position) needs to transfer $50 to the seller (short position).
B) the seller (short position) needs to transfer $50 to the buyer (long position).
C) nothing happens since with a futures contract all payments are made at the settlement date.
D) nothing happens since marked to market adjustments only take place when the market price falls below the contract price.

Question

Quizplus · Accepted Answer

When the market price of wheat increases to $3.00 per bushel, the seller (short position) needs to transfer $50 to the buyer (long position). This is because the market price has increased by $0.50 per bushel, resulting in a loss for the seller. The futures contract is marked to market daily, meaning that any gains or losses are realized and settled on a daily basis. Therefore, the $50 transfer is necessary to account for the daily market price change.

There Is a Futures Contract for the Purchase of 100