Introduction
Future contracts are the business agreement/contracts which business parties buy and use them to make future transactions. The main aim of trading with future contracts is to overcome the uncertainties caused by changes in the exchange rates (Arezki et al., 2014). For instance, a car in Britain is worth 2000 sterling pounds, yet the current exchange rate is 1 sterling pound=1.5 USD. If an American buys this car today, it will cost him or her $3000. But if in two-year time the exchange rate rises to 1 sterling pound=2 USD, it will cost an American $4000 to purchase the same car. To overcome this burden, one can buy a future contract today (in the form of sterling pounds) and still be able to buy this car in future at $3000, regardless of changes in the exchange rate. This paper seeks to present how bond account changes with fluctuations in future contract’s prices.
The first step in this assignment will be to determine the number of futures contract I have considering today's open price and the bond balance available. To do so, I will divide the bond balance by the current open price.
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That is: The number of future contracts = bond balance ÷ today’s open price
Bond balance = $1700
Today’s open price=$1.1768
Therefore, the number of future contracts will be= 1700 ÷ 1.1768 =1444.596 future contracts
Next, we will assume that the current number of future contracts will prevail in the coming days regardless of changes in the open prices. However, the difference will be felt in the bond balance (Barker et al., 2013).
First Day
In the first day, the open price will increase by 1% from the current one. Therefore, the current price on day one will be 101% of 1.1768, which will be equals to $1.1886. Bond balance in day one will be equals to the number of future contracts multiplied by the then-price (i.e., 1444.596 × $1.1886 =$1717).
Second Day
In the second day, the open price will increase by 2% from the current one. As a result, the open price on day two will be 102% of 1.1768, which will be equals to $1.2003. Bond balance in day two will, therefore, be equals to the number of future contracts multiplied by the then-price (i.e., 1444.596 × $1.2003=$1733.95)
Third Day
On day three, the open price will fall by 2% from the current one. Consequently, the open price on day three will be 98% of 1.1768, which will be equals to $1.1533. Bond balance in day three will be equals to the number of future contracts multiplied by the then-price (i.e., 1444.596 × $1.1533 =$1666.05).
Based on the above calculations, $1666.05 is what will be remaining as my bond balance.
Conclusion
To conclude, this paper sought to present how bond account changes with fluctuations in future contract’s prices, and it has succeeded to do so. Firstly, the total number of future contracts was determined. That was done by dividing bond balance by the present open price. After that, an assumption was made that the number of future contracts will prevail in the coming days. In the first day, the open price increased by 1 percent prompting bond balance to rise to $1717. In the second day, the open price hiked by 2 percent, hence, increased the bond balance to $1733.95. In the third day, the open price dropped by 2%; consequently, bond balance dropped to $1666.05, which also happens to be the balance after the third day.
References
Arezki, R., Loungani, P., van der Ploeg, R., & Venables, A. J. (2014). Understanding international commodity price fluctuations.
Barker, P., Culverhouse, M., & Grannan, L. (2013). U.S. Patent No. 8,370,248 . Washington, DC: U.S. Patent and Trademark Office.
