Computation of Future Payoff

The payoff of a futures contract at expiration is the difference between the futures price at which the contract was initiated and the spot price of the underlying asset at expiration.

For a Long Position (Buyer):

• Payoff = Spot Price at Expiration - Futures Price
• Profit: If the spot price at expiration is higher than the futures price.
• Loss: If the spot price at expiration is lower than the futures price.

For a Short Position (Seller):

• Payoff = Futures Price - Spot Price at Expiration
• Profit: If the spot price at expiration is lower than the futures price.
• Loss: If the spot price at expiration is higher than the futures price.

Example:

• An investor buys a futures contract on oil at $70 per barrel.
• At expiration, the spot price of oil is $75 per barrel.
• Long Position Payoff: $75 - $70 = $5 per barrel (profit)
• Short Position Payoff (the counterparty): $70 - $75 = -$5 per barrel (loss)

Important Note: Before expiration, gains and losses are realized daily through the marking-to-market process.