Based on the price in the last trade, assume that you purchase a futures contrac

Question

Based on the price in the last trade, assume that you purchase a futures contract with a 5% margin requirement. In other words, if the current price was 250'0 and the total grain contract is worth $12,500 (5000 bushels X $2.50) then your investment would be 5% of $12,500. The profit or loss on the contract is the change in the price per bushel times 5,000 bushels. The percentage gain or loss is based on the amount you actually invested.  

Calculate your return on the investment assuming both a 10% increase in the price of the grain and a 10% drop in the price of your selected grain. Show your work.

Explanation / Answer

At 10% increase in price,

Revenue= 5000 bushels*2.5*110% = $13750

ROI= Profit/ investment

= (13750-12500)/12500

= 10%

At 10% decrease in price,

Revenue= 5000 bushels*2.5*90% = $11250

ROI = Profit/ investment

= (11250-12500)/12500

= -10%

There is a loss of 10%

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