A gold mining firm sells futures contracts worth 1000 ounces at a price of $700 per ounce for maturity one year from today.If gold futures prices increase to $702 per ounce,what is the cash flow to the producer?
A)-$2000
B)$2000
C)$0
D)$700,000
E)$702,000

Question

Quizplus · Accepted Answer

The increase in the futures price will result in a loss for the producer because they have sold the contracts at a lower price. The cash flow to the producer can be calculated as:

Cash flow = (Futures price at maturity - Contract price) x Number of contracts x Ounce per contract

Cash flow = ($702 - $700) x 1000 x 1

Cash flow = $2000

Since the cash flow is negative, it means the producer has incurred a loss of $2000. Therefore, the correct answer is A.

A Gold Mining Firm Sells Futures Contracts Worth 1000 Ounces