futures - Joey? anyone anyone? Buller?

A futures trader goes LONG one futures contract at $450. The settle price 1 day before expiration is $500. On expiration day, the future is trading at $505. The LEAST LIKELY way the futures trader will lock in her profits on expiration is: a) take delivery of the underlying asset and pay $500 to the short b) close out the futures position by selling the futures contract at $505 c) take delivery of the underlying asset and pay the expiration settlement price to the short d) cash settle the futures and receive the difference between $500 and the expiration settlement price

D

It’s a crappy question, but I think the answer is A. In fact, all of these are possible.

It says, least likely.

thank Joey, I’ve been racking my brain on this one… i agree it’s a crappy question as well. the CFAI answer was “To lock in profits, take delivery and pay short the settlement price of the previous day, not the expiration day.” does that change your answer? because it means $hit to me with regard to the options to choose from.

Check this out… adding a little more to the confusion… http://www.analystforum.com/phorums/read.php?11,756716,758035#msg-758035

Char-Lee Wrote: ------------------------------------------------------- > thank Joey, I’ve been racking my brain on this > one… i agree it’s a crappy question as well. > > the CFAI answer was “To lock in profits, take > delivery and pay short the settlement price of the > previous day, not the expiration day.” > > does that change your answer? because it means > $hit to me with regard to the options to choose > from. Huh? I think that if you notified the clearinghouse that you wanted to take delivery prior to expiration they would tell you that you needed to deal with that on your own. Edit: I guess they are saying that’s least likely?

A, this question keeps appearing : ) dont forget that derivatives = 5 or 7% of exam!

it’s A. A stalla question I believe. Although D is worded horribly, the least likely is A, you taking delivery and then paying “500” to the short. You entered at a price of 450, so you would only pay 450 to the short, NOT 500.

LjBeill Wrote: ------------------------------------------------------- > it’s A. A stalla question I believe. Although D > is worded horribly, the least likely is A, you > taking delivery and then paying “500” to the > short. You entered at a price of 450, so you > would only pay 450 to the short, NOT 500. That’s definitely not true. You entered at 450 which has absolutely nothing to do with how much you pay. Remember that you don’t even have a counterparty and if you decide to take delivery, you will just be assigned to one of the shorts by the clearinghouse. The short doesn’t have any idea when you entered the contract or at what level and doesn’t care.

so do we know the answer? i put A too…

I am pretty sure that it should be D as the question says least likely.

A - because as someone pointed out, in order to take early delivery like that you want to use a OTC contract rather than a standardized futures contract.

I think it’s A, simply because you are not locking in any profit. Once the contract expires, you’re still exposed to market movements of the underlying asset that’s being delivered.

The only correct way from the choices is b) close out the futures position by selling the futures contract at $505. So, A, C, and D are least likely. You can’t do those choices in futures. That’s what I know. This makes me think that the question is really which is the most likely option, and the answer is B.

You can do all of these. Whattya talking about?

DMF Wrote: ------------------------------------------------------- > A - because as someone pointed out, in order to > take early delivery like that you want to use a > OTC contract rather than a standardized futures > contract. You actually kinda can take early delivery by doing an EFP. You just have to find someone willing.

JDV, for A, why are you paying the short $500?

You aren’t usually. The problem is that the amount you pay the short is not necessarily the futures price. For many futures contracts - notably bond futures - there are lots of different things that can be delivered and a different price on all of them. Easier than bonds is something like KC wheat: “No. 2 at contract price with a maximum of 10 IDK per 100 grams; No. 1 at a 1 1/2-cent premium, No. 3 at a 5-cent discount”

But on this question it is the same contract. You went long at $450 and it went up to $505, so you pay $450 and take delivery, then sell for $505, unless I’m way off on this.