V5-92 A futures trader goes long one futures contract at $450. The settlement 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 --------------------------------------------- my guess:C “C.pay expiration settlement price505 will give long side zero profit. A.Long side pay 500 for asset and D difference between 500 and expiration settlement price 505 are also weird. Long only need pay 450, or receive difference between 450 and expiration settlement price 505”
notice, A is a subset of C, C is only more worse than A. so i’d cross out both these choice. B sounds like he gets to keep all the money, so i’d cross this one out. Leaves me with D. Also I think it can’t be A, C, because you could always sell the asset at 500, or 505. I don’t know man, i haven’t done this study session.
A and D are similar, giving you $5 gain.
if a and d same, then C is the only answer left to pick then.
C option —> settlement price of this contract is $450. This means he pays 450 and sells for 505 resulting in $55 profit is settlement price = strike price ?? I am so confused now
annexguy Wrote: ------------------------------------------------------- > V5-92 A futures trader goes long one futures > contract at $450. The settlement 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. You actually don’t really know what he is going to pay the short, but here they are trying to get you to say that you take delivery at yesterday’s prices. Nope. Answer is A > B. close out the futures position by selling the > futures contract at $505. By far the most likely > C. take delivery of the underlying asset and pay > the expiration settlement price to the short. Second most likely. > D. cash settle the futures and receive the > difference between $500 and the expiration > settlement price Tied for second most likely. Here it is a cash settled futures contract and you can just let it expire and take the money. > --------------------------------------------- > my guess:C “C.pay expiration settlement price505 > will give long side zero profit. > A.Long side pay 500 for asset and D difference > between 500 and expiration settlement price 505 > are also weird. Long only need pay 450, or receive > difference between 450 and expiration settlement > price 505”
C It is a Futures contract, the short party is the clearinghouse, why would you want to find someone exactly the opposite your position and take delivery and have an ex-pit transaction…why not just sell your contract to someone for $505 or cash settle… thoughts?
JoeyDVivre Wrote: ------------------------------------------------------- D. cash settle the futures and receive the > > difference between $500 and the expiration > > settlement price > > Tied for second most likely. Here it is a cash > settled futures contract and you can just let it > expire and take the money. > > > --------------------------------------------- how much is the expiration settlement price ? $450. why only received difference between $500 and $450. the market price is already $505. long side should receive difference between $505 and $450.
Yeah I skipped straight to D beacuse it looked wrong. You should receive the difference between 450 & the expiration price shouldn’t you?
annexguy Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > D. cash settle the futures and receive the > > > difference between $500 and the expiration > > > settlement price > > > > Tied for second most likely. Here it is a cash > > settled futures contract and you can just let > it > > expire and take the money. > > > > > --------------------------------------------- > > how much is the expiration settlement price ? > $450. > why only received difference between $500 and > $450. the market price is already $505. long side > should receive difference between $505 and $450. The long side has already received the difference between 450 and 500 with daily MTM settles.
OK, I’d like summary the discussion here. A. take delivery of the underlying asset and pay $500 to the short. (wrong, if take delivery of underlying aseet, long side only pay original purchase price,i.e. expiration settlement price $450.) B. close out the futures position by selling the futures contract at $505. (right, if long side close out position On expiration day when future price is $505) C. take delivery of the underlying asset and pay the expiration settlement price to the short. (right.if take delivery of underlying aseet, long side only pay original purchase price,i.e. expiration settlement price $450.) D. cash settle the futures and receive the difference between $500 and the expiration settlement price (right. if long side close out position 1 day before expiration when future price is $500. this choice seems wrong, but long side may close position 1 day before expiration to lock part of profit. not whole profit. and this Q is asking which is least likely, this choice is more likely than A.)
annexguy Wrote: ------------------------------------------------------- > OK, I’d like summary the discussion here. > A. take delivery of the underlying asset and pay > $500 to the short. > (wrong, if take delivery of underlying aseet, long > side only pay original purchase price,i.e. > expiration settlement price $450.) > > B. close out the futures position by selling the > futures contract at $505. > (right, if long side close out position On > expiration day when future price is $505) > > C. take delivery of the underlying asset and pay > the expiration settlement price to the short. > (right.if take delivery of underlying aseet, long > side only pay original purchase price,i.e. > expiration settlement price $450.) > No - the long will be invoiced for the futures settlement price, say $505. However, the long entered planning on paying $450. Since the futures contract rose to 505, he has $55 in his margin account to pay the difference. > D. cash settle the futures and receive the > difference between $500 and the expiration > settlement price > (right. if long side close out position 1 day > before expiration when future price is $500. this > choice seems wrong, but long side may close > position 1 day before expiration to lock part of > profit. not whole profit. and this Q is asking > which is least likely, this choice is more likely > than A.) cash settle is different than close out. cash settle means you let the contract expire say on an S&P contract. The contract is cash settled so they will adjust your margin account on the last day in the usual MTM way. Then the contract just goes away. Clsoing out your position means you find someone else to take it.
the answer is C because you wouldn’t pay the expiration price, you would pay the (one day prior to expiration) price
JoeyDVivre Wrote: ------------------------------------------------------- > > C. take delivery of the underlying asset and > pay > > the expiration settlement price to the short. > > (right.if take delivery of underlying aseet, > long > > side only pay original purchase price,i.e. > > expiration settlement price $450.) > > > No - the long will be invoiced for the futures > settlement price, say $505. However, the long > entered planning on paying $450. Since the > futures contract rose to 505, he has $55 in his > margin account to pay the difference. > [annex: I see long side’s margin account balance will be adjusted daily to reflect future price change.] > > D. cash settle the futures and receive the > > difference between $500 and the expiration > > settlement price > > (right. if long side close out position 1 day > > before expiration when future price is $500. > this> > choice seems wrong, but long side may close > > position 1 day before expiration to lock part > of> > profit. not whole profit. and this Q is asking > > which is least likely, this choice is more > likely > > than A.) > > cash settle is different than close out. cash > settle means you let the contract expire say on an > S&P contract. The contract is cash settled so > they will adjust your margin account on the last > day in the usual MTM way. Then the contract just > goes away. Clsoing out your position means you > find someone else to take it. [annex, one day before expiration’s price is 500, and long’s margin balance adjusted based on 500. on day of expiration ,expiration settlement price is 505. so long margin balance will be added different between the day before price 500 and expiration settlement price 505.] am I right now, Joey
Yep so there is an additional 5 added on the last day (or in the case of an S&P contract, 5*$250 added to the margin account for a “big” and 5*$50 for a “mini”).