We have a futures contract for the purchase of 10,000 bushels of wheat at $3.00 per bushel. If the price of wheat were to increase to $3.50, explain what happens to the parties involved in the contract in terms of marking to market. Be sure to identify who is long and short and specifically how much is transferred.
What will be an ideal response?
The buyer of the contract, the long position, will pay $30,000 for 10,000 bushels of wheat. The seller of the contract, the short position, delivers 10,000 bushels of wheat and receives $30,000. If before expiration the market price of wheat increases to $3.50 the seller, (short) will have to give the buyer, (long) $5000 so that the buyer will still only have to pay $30,000 for the wheat. So the buyer's margin account will be marked to market (credited) with $5,000, which comes from the seller's margin account which is marked to market (debited) for the $5,000.
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