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FRM Part I · FRM Exam Part I · Futures Markets

A short futures position is opened at 120.00 on 500 units per contract (1 contract). Settlement prices on three consecutive days are 122.00, 119.00 and 118.00. The trader then closes the position at 118.50 the next day. Which statement about the total gain/loss and the daily cash flows is correct?

The short position earns a total of USD 750, with daily settlement flows of -1,000, +1,500, +500 and -250. A short loses when prices rise and gains when they fall, and the flows sum to (120.00 - 118.50) x 500 = USD 750.

  1. ATotal gain of USD 750; daily flows are -1,000, +1,500, +500, then -250Correct
  2. BTotal gain of USD 750; daily flows are +1,000, -1,500, -500, then +250
  3. CTotal loss of USD 750; daily flows are -1,000, +1,500, +500, then -250
  4. DTotal gain of USD 1,500; daily flows are -1,000, +1,500, +500, then -250

Explanation

Short gains when price falls. Day 1: 120 to 122 gives -2 x 500 = -1,000. Day 2: 122 to 119 gives +3 x 500 = +1,500. Day 3: 119 to 118 gives +500. Closing: 118 to 118.50 gives -0.5 x 500 = -250. Sum = +750, which equals (120-118.5) x 500. Reversed signs treat it as a long.

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