There is a futures contract for the purchase of 1000 bushels of corn at $3.00 per bushel.If the market price of corn falls to $2.50:
A)The buyer (long position) needs to transfer $500 to the seller (short position).
B)The seller (long position) needs to transfer $500 to the buyer (short position).
C)Nothing happens since marked to market adjustments only occur if the market price rises above the contract price.
D)Nothing happened since no funds are transferred until the settlement date.

Question

Quizplus · Accepted Answer

When the market price of corn falls to $2.50, the contract price is now greater than the market price. As such, the buyer (long position) needs to make a marked to market adjustment and transfer $500 to the seller (short position). This is because the contract requires the buyer to purchase corn at the agreed-upon price, even if the market price has fallen. The marked to market adjustment ensures that both parties uphold their end of the contract and reduces the risk of default.

There Is a Futures Contract for the Purchase of 1000