An investor enters into a forward contract to buy 4,000 barrels of oil in three months at $80 a barrel.At the maturity of the contract,the spot price of oil is $65 a barrel.The investor's payoff (gain/loss)from the forward contract is
A)A gain of $60,000
B)A loss of $60,000
C)A gain of $260,000
D)A loss of $260,000

Question

Quizplus · Accepted Answer

The investor agreed to buy oil at $80 a barrel but the spot price at maturity is $65 a barrel, meaning they are paying $15 more per barrel than the market price. For 4,000 barrels, this results in a loss of 4,000 * $15 = $60,000.

An Investor Enters into a Forward Contract to Buy 4,000