On the 30-yr bond contract there are probably 30 bonds deliverable. There is only 1 KC wheat contract above. For the second part, read this again “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.”
Joey, if I buy a July gold contract for $450 and Gold goes up to $505, how much money have I made? Isn’t it $55? If I decided to take delivery of gold, I would do that and the short will have to deliver it to me (ignoring the mechanics of this, not important for the question). Isn’t this what hedging is? Again, unless I’m really way off on this one, or the question is straightforward.
Gold only has one deliverable grade. For COMEX gold, you have made 100*55 = $5500 which is currently in your margin account. If you take delivery, you will get some receipt from a gold depository in Manhattan that says you have 100 oz of gold and you will be invoiced for 505*100 = $50,500. The net is that you have just bought 100 oz of gold for $45,000.
Exactly, that’s why B is the answer, and all the other choices are wrong.
dreary, why isn’t it (A). to take delivery the long should have paid the short $450 and received $505 in what ever the physical asset was… wait check that, C & D still seem like LEAST LIKELY so best guess here is the question should have said “MOST LIKELY” an should have been (B)…
but A says … take delivery of the underlying asset and pay $500 to the short
why would the long pay $500? the long entered the contract at $450… so if the value increases then the long wins by having the right to buy the asset at $450 even though it’s now worth $505… so that should be a “LEAST LIKELY”
> so best guess here is the question should have said “MOST LIKELY” an should have been (B)… I’m with that.
Char-Lee Wrote: ------------------------------------------------------- > why would the long pay $500? the long entered the > contract at $450… so if the value increases then > the long wins by having the right to buy the asset > at $450 even though it’s now worth $505… so that > should be a “LEAST LIKELY” Read again. The long does not have the right to buy at $450. That’s a different derivative…
damn, this question is the gift that just keeps giving… Joey, I must be lost but “A futures trader goes LONG one futures contract at $450” i thought meant the long has the right (or obligation i guess) to buy at $450 if they wish to take delivery… how am i wrong?
i can just chalk this up as a crappy CFAI question… and that is fine… but if i could just get “the answer” i could sleep better tonight!
change to most likely and yuo’ll be fine 
Dreary Wrote: ------------------------------------------------------- > change to most likely and yuo’ll be fine Zzzzzzzzzzzzzzzzzzzzzzzzzz
I confused now myself. Char-lee, where did you get this question from? I know I have ran into it before. Do you have the correct answer on an answer sheet somewhere? I am coming up with the same conclusion as you.
oh, its from a sample exam.
yes, i jsut came across this and I picked A. But the official answer is B… I do not understand… Maybe the question really is asking the most likely rather than most UNlikely way to close out a contract…