02.07.2022 - 05:35

A trader enters into a LONG position of corn futures contract when the futures is trading at $3.62/bushel. The contract is for the delivery of 5,000 bushels in seven months. Suppose the trader holds the position till maturity. (1) What is the payoff func Question: A trader enters into a LONG position of corn futures contract when the futures is trading at$3.62/bushel. The contract is for the delivery of 5,000 bushels in seven months. Suppose the trader holds the position till maturity.

(1) What is the payoff function of the trader at maturity if the futures price is FT?

(2) What does the trader gain or lose if the corn price is $3.52 at maturity? (3) Draw the corresponding position diagram and mark the gain/loss in (2) on the diagram. (4) Suppose that instead of a long position, the trader enters into a short position (futures price and contract specifications are still the same as stated above) (i) What is the payoff function of the trader if the futures price is FT? (ii) What does the trader gain or lose if the corn price is$3.72 at maturity?

(iii) Draw the corresponding position diagram and mark the gain/loss in (4)-(ii) on the diagram.

(1) The payoff function of the trader at maturity can be calculated using the formula: Payoff = (FT  $3.62) ? 5,000. If the futures price at maturity is FT, then the trader's payoff will be positive if FT is greater than$3.62 and negative if FT is less than $3.62. (2) If the corn price is$3.52 at maturity, then the trader will incur a loss. The calculation can be done as follows: Payoff = ($3.52 $3.62) ? 5,000 = -$500. This means that the trader will lose$500 on the position. (3) The position diagram for the long position would show a profit if the futures price at maturity is above $3.62 and a loss if it is below$3.62. The break-even point would be $3.62, where the profit or loss is zero. The gain/loss at maturity of$3.52 can be marked on the diagram as a loss of $500 below the break-even point. (4) (i) The payoff function for a short position can be calculated using the formula: Payoff = ($3.62  FT) ? 5,000. If the futures price at maturity is FT, then the trader's payoff will be positive if FT is less than $3.62 and negative if FT is greater than$3.62. (ii) If the corn price is $3.72 at maturity, then the trader will incur a loss. The calculation can be done as follows: Payoff = ($3.62  $3.72) ? 5,000 =$-500. This means that the trader will lose $500 on the position. (iii) The position diagram for the short position would show a profit if the futures price at maturity is below$3.62 and a loss if it is above $3.62. The break-even point would be$3.62, where the profit or loss is zero. The gain/loss at maturity of $3.72 can be marked on the diagram as a loss of$500 above the break-even point.