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Assume the corn spot and 1-year futures prices per bushel today are 3.48 and 3.56 cents, respectively. The initial margin requirement to buy the futures

Assume the corn spot and 1-year futures prices per bushel today are 3.48 and 3.56 cents, respectively. The initial margin requirement to buy the futures contract is 5%. The standard contract size for corn futures is 5,000 bushels. The carrying costs for the corn bought from the spot market will be 1% to cover shipping, insurance, storage/warehousing, etc.

You decide to speculate on the corn futures and buy 10 contracts today and pay cash into the margin account to meet the initial margin requirement. One month later, the corn price in the spot market drops by 1.65% as compared to today’s price.

1. What will be your profits/losses?

2. What will be your return on your initial cash outlay?

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