Tyler buys a futures contract from Alex that gives him the right to buy 1,000 barrels of oil at $125 per barrel in 48 months. What happens in 48 months if the actual price per barrel of oil is $100?
A) Tyler made a profit of $25 per barrel, or $25,000.
B) Alex must give Tyler $10,000.
C) Tyler must pay Alex $25,000.
D) The contract becomes void because the price turned out lower than expected.

Question

Quizplus · Accepted Answer

Since Tyler has the right to buy 1,000 barrels of oil at $125 per barrel, he essentially committed to paying Alex $125,000 for the oil in 48 months. However, since the actual price per barrel of oil is only $100, Tyler would have to pay $100,000 for the oil instead. Therefore, Tyler must pay Alex the difference of $25 per barrel, which comes out to be $25,000. Choice A is incorrect because Tyler did not make a profit - he actually lost money in this scenario. Choice B is incorrect because the contract is not designed for Alex to give Tyler money if the price is lower than expected. Choice D is incorrect because the contract is still valid even if the price turns out to be lower than expected.

Tyler Buys a Futures Contract from Alex That Gives Him