A trader enters into a short cotton futures contract when the futures price is 50 cents

per pound. The contract is for the delivery of 50,000 pounds. How much does the
trader gain or lose if the cotton price at the end of the contract is (a) 48.20 cents per
pound and (b) 51.30 cents per pound?
(a) If the cotton price at the end of the contract is 4

8.20 cents per pound:

Gain or Loss = (Initial Futures Price - Final Cotton Price) * Contract Size

Gain or Loss = (50 cents - 48.20 cents) * 50,000 pounds

Gain or Loss = 1.80 cents * 50,000 pounds

Gain or Loss = $900

In this case, the trader gains $900 because they sold the contract at 50 cents per pound and was able
to buy it back at 48.20 cents per pound, profiting from the price decrease.

(b) If the cotton price at the end of the contract is 51.30 cents per pound:

Gain or Loss = (Initial Futures Price - Final Cotton Price) * Contract Size

Gain or Loss = (50 cents - 51.30 cents) * 50,000 pounds

Gain or Loss = -1.30 cents * 50,000 pounds

Gain or Loss = -$650

In this case, the trader incurs a loss of $650 because they sold the contract at 50 cents per pound and
had to buy it back at 51.30 cents per pound, resulting in a higher price.

So, the trader gains $900 if the cotton price is 48.20 cents per pound at the end of the contract and
incurs a loss of $650 if the cotton price is 51.30 cents per pound at the end of the contract.