Suppose you agree to purchase one-ounce of gold for £382 any time over the next month.The current price of gold is £380.The spot price of gold then falls to £377 the next day.If the agreement
Is represented by a futures contract marking to market on a daily basis as the price changes, what is
Your cash ﬂow at the end of the business on the next day?
A)£ 0
B)£ 3
C)£ 5
D)£-3
E)£-5

Question

Quizplus · Accepted Answer

When the spot price of gold falls to £377, the futures contract price will also fall to £377. Since you agreed to purchase one ounce of gold for £382, but the current price is now £377, you will have a loss of £5 per ounce. However, since the futures contract is marked to market on a daily basis, your loss of £5 per ounce will be offset by a gain of £5 per ounce. Therefore, your cash flow at the end of the day will be £0. This means that the correct answer is D, £0.

Suppose You Agree to Purchase One-Ounce of Gold for £382