John and Tom enter into a futures contract where 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 Tom 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

Since the market price of coffee is higher than the price agreed upon in the futures contract, John would be losing money if he were to deliver the 500 crates of coffee to Tom for $200 per crate. Therefore, the best option for both parties would be for John to offer a cash settlement to Tom for the difference between the futures price and the market price (which is $10 per crate, or $5,000 total). Tom would receive the cash and John would not have to deliver any coffee.

John and Tom Enter into a Futures Contract Where John