July oats are trading at $2.48, analysis says they will sell at $2.40 in a couple of months. what kind of return on capital will she make if she shorts 3 july oats contracts ( each contract covers 5,000 bushels of oats) by depositing an initial margin of $540 per contract
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To calculate the return on capital from shorting the July oats contracts, we need to understand the profit or loss made from the price difference and the initial margin.
1. Calculate the initial margin for 3 July oats contracts:
Initial margin per contract = $540
Total initial margin = $540 per contract * 3 contracts = $1,620
2. Determine the cost of shorting 3 July oats contracts:
Cost of shorting = (Price at which oats are sold - Current price) * Quantity
Quantity = 3 contracts * 5,000 bushels per contract = 15,000 bushels
Cost of shorting = ($2.40 - $2.48) * 15,000 bushels = -$1,200
Note: As the price decreased, shorting the contracts results in a profit.
3. Calculate the return on capital:
Return on capital = Profit / Initial margin
Profit = Cost of shorting (-$1,200)
Initial margin = $1,620
Return on capital = (-$1,200) / $1,620 ≈ -0.74
Therefore, the return on capital would be approximately -0.74, indicating a negative return.