A milling company buys a futures contract that requires it to take delivery of 5,000 bushels of wheat at a price of $6.75 per bushel.Next day the price of the future is $6.80.The miller:
A) must pay an extra $0.05 a bushel into its margin account.
B) can withdraw $0.05 from its margin account.
C) does not need to do anything until the contract matures.
D) can't say without knowing what happened to the spot price.

Question

Quizplus · Accepted Answer

The increase in the price of the futures contract means that the value of the contract has increased by $0.05 per bushel ($6.80 - $6.75 = $0.05). The milling company must cover this increase in value by adding $0.05 per bushel to its margin account.

A Milling Company Buys a Futures Contract That Requires It