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 $752 per ounce,what is the cash flow to the producer?

Question

Quizplus · Accepted Answer

The cash flow to the producer can be calculated using the formula: 
Cash flow = (Futures price at maturity - Futures price at contract initiation) x Number of contracts x Size of each contract 
= ($752 - $700) x 1000 x 1 
= $52,000 
Since the futures price has increased, the producer would receive a positive cash flow of $52,000. However, since the question asks for the cash flow to the producer, the answer should be negative, indicating that the producer has a liability to pay this amount to the buyer of the futures contract. Therefore, the correct answer is D, -$52,000.

A Gold Mining Firm Sells Futures Contracts Worth 1000 Ounces