Response to the following problem:
One of the unique features of futures contracts is that they have only one source of return-the capital gains that can accrue when price movements have an upward bias. Remember that there are no current cash flows associated with this financial asset. These instruments are known for their volatility due to swings in prices and the use of leverage upon purchase. With futures trading done on margin, small amounts of capital are needed to control relatively large investment positions. Assume that you are interested in investing in commodity futures-specifically, greasy wool futures contracts. Refer to Figure 15.2. Suppose you had purchased five June 2011 greasy wool contracts at the settlement price of 1025. The required amount of investor capital to be deposited with a broker at the time of the initial transaction is $825 per contract.
Create a spreadsheet to model and answer the following questions concerning the investment in futures contracts.
1. What is the total amount of your initial deposit for the five contracts?
2. What is the total amount of kilograms of greasy wool that you control?
3. What is the purchase price of the greasy wool commodity contracts you control according to the June settlement date?
4. Assume that June greasy wool actually settles at 1125; you decide to sell and take your profit. What is the selling price of the greasy wool commodity contracts?
5. Calculate the return on invested capital earned on this transaction (remember that the return is based on the amount of funds actually invested in the contract, rather than on the value of the contract itself).