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 next business day?
A) $0
B) $3
C) $5
D) -$3
E) -$5

Question

Quizplus · Accepted Answer

When the spot price fell to $377, the value of the futures contract also fell by $3 ($380-$377) per ounce. Since the contract is marked to market on a daily basis, the exchange will credit or debit the difference to the trader's account. In this case, the trader agreed to purchase one ounce of gold at a price of $382, which is $5 higher than the current spot price of $377. Therefore, the trader incurs a loss of $3 due to the decrease in the spot price and has to pay an additional $2 ($382-$380) to fulfill the contract. Hence, the cash flow at the end of the next business day is -$3.

Suppose You Agree to Purchase One Ounce of Gold for $382