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    Question

    In a futures contract, if the spot price at maturity is

    lower than the agreed futures price, the party with a 'Short Position' will:
    A Incur a loss. Correct Answer Incorrect Answer
    B Make a profit. Correct Answer Incorrect Answer
    C Neither make a profit nor a loss. Correct Answer Incorrect Answer
    D Have the right to cancel the contract. Correct Answer Incorrect Answer
    E Be obligated to buy the asset at the spot price. Correct Answer Incorrect Answer

    Solution

      • Short Position (Seller): Ā Has theĀ  obligation to sell Ā the asset at the futures price.
      • At maturity, the futures price converges with the spot price.
      • IfĀ  Spot Price < Futures Price , the short position holder canĀ  buy the asset cheaply in the spot market Ā (at the lower spot price) andĀ  sell it at the higher agreed futures price Ā to fulfill the contract.
      • Profit for Short Position = Futures Price - Spot Price Ā (a positive number in this scenario).
        Example:Ā Futures price = ā‚¹100, Spot at expiry = ā‚¹90. The short seller buys at ā‚¹90 and sells at ā‚¹100, making a ā‚¹10 profit (before transaction costs).

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