The seller of a pork bellies futures contract at $.41 per pound noted that the closing price of pork bellies was $0.44 today.What will happen to this contract, which requires delivery of 40,000 of pork bellies at expiration?

Question

Quizplus · Accepted Answer

The seller of the pork bellies futures contract is obligated to deliver 40,000 pounds of pork bellies at the contract's expiration date. Since the contract was sold at $.41 per pound, the seller is expecting to receive $.41 per pound when delivering the pork bellies.

However, the closing price for pork bellies on the expiration date is $0.44 per pound, which means that the buyer of the contract has the right to buy pork bellies at the lower price of $.41 while the market price is higher at $.44.

To fulfill the contract, the seller has to buy pork bellies at the market price of $0.44 per pound, which is higher than the contracted price of $.41 per pound. Therefore, the seller incurs a loss of $0.03 per pound, which translates to a total loss of $1,200 (40,000 pounds x $0.03).

So, the correct choice is C, a loss of $1,200 is posted to the account.

The Seller of a Pork Bellies Futures Contract at