John and Tom enter into a futures contract in which John agrees to deliver 500 crates of coffee to Tom one year from now. Tom agrees to pay a price of $200 per crate. A year from now, John and Tom find that the market price of coffee is $210 per crate. How might they make a cash settlement on the contract?
A) John will offer $5,000 to Tom and deliver the 500 crates of coffee.
B) Tom will offer $5,000 to John and deliver the 500 crates of coffee.
C) John will offer $5,000 to Tom and not deliver any crates of coffee.
D) Tom will offer $5,000 to John and not deliver any crates of coffee.

Question

Quizplus · Accepted Answer

John will offer $5,000 to Tom and not deliver any crates of coffee. This is because the market price of coffee is $210 per crate, which is higher than the contract price of $200 per crate. Therefore, John would lose money if he delivered the coffee to Tom. Instead, he can offer Tom $5,000 to cancel the contract, which would save him from having to deliver the coffee at a loss.

John and Tom Enter into a Futures Contract in Which