Benjamin bought a contract for future delivery of 5000 bushels of oats at $3.64 per bushel and sold a later contract at $3.92 a bushel. A month later, corn prices were rising and Joseph sold his long contract for $4.01 per bushel and covered his short by purchasing a contract for $3.99 per bushel. Ignoring trading costs, Joseph
A) broke even.
B) made a profit of $1,850.
C) lost $1,500.
D) made a profit of $1,500.

Question

Quizplus · Accepted Answer

Joseph made a profit on both the long and the short positions. For the long position, he bought at $3.64 and sold at $4.01, making a profit of $0.37 per bushel. For the short position, he sold at $3.92 and covered at $3.99, making a profit of $0.07 per bushel. The total profit is ($0.37 + $0.07) * 5000 = $2.20 * 5000 = $11,000. However, there was an error in the calculation of the short position profit; it should be a loss of $0.07 per bushel, not a profit. Correcting this, the total profit is ($0.37 - $0.07) * 5000 = $0.30 * 5000 = $1,500.

Benjamin Bought a Contract for Future Delivery of 5000 Bushels