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):  Has the  obligation to sell  the asset at the futures price.
      • At maturity, the futures price converges with the spot price.
      • If  Spot Price < Futures Price , the short position holder can  buy the asset cheaply in the spot market  (at the lower spot price) and  sell it at the higher agreed futures price  to fulfill the contract.
      • Profit for Short Position = Futures Price - Spot Price  (a positive number in this scenario).
        Example: Futures price = ₹100, Spot at expiry = ₹90. The short seller buys at ₹90 and sells at ₹100, making a ₹10 profit (before transaction costs).

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