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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives

In a futures contract on a stock index, which of the following correctly describes the position of a buyer at expiry if the settlement price is higher than the price at which the buyer entered the contract?

A futures buyer profits when the settlement price exceeds the entry price. The gain equals the price difference multiplied by the lot size, because a long position benefits from rising prices. Futures involve no premium, and losses are not limited to the margin deposited.

  1. AThe buyer makes a loss equal to the price difference times the lot size
  2. BThe buyer makes a profit equal to the price difference times the lot sizeCorrect
  3. CThe buyer makes a profit equal to the premium received
  4. DThe buyer's loss is limited to the margin paid

Explanation

A long futures position gains when the settlement price rises above the entry price. Profit equals (settlement price - entry price) x lot size. Futures have no premium, so the premium option is wrong, and losses are not capped at margin.

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