Question
The dollar value of one Big Dow Index futures contract is the product of the futures price and the futures contract multiple ($25). If the
The dollar value of one Big Dow Index futures contract is the product of the futures price and the futures contract multiple ($25). If the futures price is 10,000, then the contract value is $250,000 (10,000 x $25). The contract is cash settled, so at the settlement date, cash is exchanged between the long and short positions. The current level of the index is 12,000. You are a mutual fund manager and you think that the Dow Jones Industrial Index is going to rise. To speculate on this expectation, you buy 50 of the Big Dow futures contracts in the September maturity. Assume that one week passes and the index rises to 12,090 and the futures prices rise accordingly. Assume that you execute an offset trade at that time and sell 50 of the Big Dow futures contracts in the September maturity. What is your cumulative profit on the trades?
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