Investments, tenth edition

Day

Profit (Loss) per Ounce 3 5,000 Ounces/Contract 5 Daily Proceeds

1

30.20 2 30.10 5  

.10

$500

2

30.25 2 30.20 5    .05

250

3

30.18 2 30.25 5 2.07

2

350

4

30.18 2 30.18 5  

 

 

0

0

5

30.21 2 30.18 5    .03

 150

Sum 5 $550

bod61671_ch22_770-798.indd   780

bod61671_ch22_770-798.indd   780

7/27/13   1:48 AM

7/27/13   1:48 AM

Final PDF to printer

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  C H A P T E R  

2 2

 Futures 

Markets 

781

 The futures exchange may set limits on the amount by which futures prices may 

change from one day to the next. For example, if the price limit on silver contracts were 

set at $1 and silver futures close today at $22.10 per ounce, then trades in silver tomor-

row may vary only between $21.10 and $23.10 per ounce. The exchanges may increase 

or reduce price limits in response to perceived changes in price volatility of the contract. 

Price limits are often eliminated as contracts approach maturity, usually in the last month 

of trading. 

 Price limits traditionally are viewed as a means to limit violent price fluctuations. This 

reasoning seems dubious. Suppose an international monetary crisis overnight drives up the 

spot price of silver to $30. No one would sell silver futures at prices for future delivery as 

low as $22.10. Instead, the futures price would rise each day by the $1 limit, although the 

quoted price would represent only an unfilled bid order—no contracts would trade at the 

low quoted price. After several days of limit moves of $1 per day, the futures price would 

finally reach its equilibrium level, and trading would occur again. This process means no 

one could unload a position until the price reached its equilibrium level. We conclude that 

price limits offer no real protection against fluctuations in equilibrium prices.  

  Taxation 

 Because of the mark-to-market procedure, investors do not have control over the tax year 

in which they realize gains or losses. Instead, price changes are realized gradually, with 

each daily settlement. Therefore, taxes are paid at year-end on cumulated profits or losses 

regardless of whether the position has been closed out. As a general rule, 60% of futures 

gains or losses are treated as long term, and 40% as short term.