There is a futures contract for the purchase of 100 bushels of wheat at $2.50 per bushel.If 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

If the market price of wheat increases to $3.00 per bushel, the buyer (long position) can sell the futures contract at this higher price and make a profit of $0.50 per bushel ($3.00 - $2.50). This profit is paid by the seller (short position), who would need to transfer $50 ($0.50 × 100 bushels) to the buyer (long position). This process is called marking to market, which is a daily settlement of the gains and losses in a futures contract based on the current market price.

There Is a Futures Contract for the Purchase of 100