if you purchase $100000 interest rate futures contract for 110, and the price of the treasury securities on the expiration date is 106? profit or loss of how many?
The correct answer and explanation is:
The profit or loss on the interest rate futures contract can be calculated by looking at the difference between the purchase price and the expiration price, then multiplying that difference by the contract size.
In this case, the purchase price is 110 and the expiration price is 106. The contract size is $100,000.
Step 1: Calculate the difference in price
The difference between the purchase price (110) and the expiration price (106) is: 110−106=4110 – 106 = 4
Step 2: Multiply the difference by the contract size
The contract size is $100,000. Since futures contracts are quoted in terms of 1/32 of a point, the 4-point difference represents 4/32 of a full point. 4 points=432=0.125 of a full point4 \, \text{points} = \frac{4}{32} = 0.125 \, \text{of a full point}
Therefore, the change in value per point is $100,000. Profit/Loss per point=100,000×0.125=12,500\text{Profit/Loss per point} = 100,000 \times 0.125 = 12,500
Step 3: Determine the profit or loss
Since the price has decreased from 110 to 106, this is a loss for the holder of the long position in the futures contract. Profit/Loss=−12,500\text{Profit/Loss} = -12,500
Thus, the loss is $12,500.
Explanation
Futures contracts are used to speculate on the direction of prices for financial instruments like Treasury securities. When purchasing a futures contract, you are taking a position that benefits from rising prices, while you incur losses when prices fall. In this case, because the price of the underlying Treasury securities decreased from 110 to 106, the futures contract holder has experienced a loss. The amount of this loss is calculated based on the price movement and the size of the contract.