Question20 Farmer Brown has agreed to deliver apples on an agreement in 270 days. The price of apples increased yesterday. Farmer Brown receives a margin call this morning. What type of position has he entered into? Sold a forward contract A short call option (European or American) A long put option (European or American) A short futures position None of the options are correct ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

The situation describes Farmer Brown agreeing to deliver apples in 270 days and receiving a margin call this morning after the price of apples increased yesterday. This setup points toward a standard futures contract, where positions are marked to market daily and margin calls occur when the contract moves against you.

Option 1: Sold a forward contract
- Forwards are private, over-the-counter agreements to buy/sell an asset at a specified price at a future date. They typically do not involve daily marking to market, so margin calls in the middle of the contract are not the standard mechanism. Therefore, this choice explains margin calls poorly in the given context.
- The question emphasizes a margin call today due to price movement, which aligns more with exchange-traded futures rather than a private forward.

Option 2: A short call option (European or American)
- Writing (selling) a call option can involve margin requirements, but a margin call driven by a price rise in the underlying at delivery time for a long horizon (270 days) is not the typical feature described here. It would depend on implied volatility and time value, not a straightforward margin call caused by a daily settlement mechanism.
- Moreover, the scenario highlights the obligation to deliver apples in 270 days, which is characteristic of a forward/futures-style obligation, not merely selling an uncovered call.

Option 3: A long put option (European or American)
- A long put gives the holder the right to sell at a strike price; if the price of apples rose, the long put would likely lose value, not trigger a margin call in the classic sense. Margin calls are more associated with positions that lose value and have to post additional collateral, which is not typical for a long put in this context.
- This option contradicts the effect of a rising underlying price for a put holder and does not fit the described obligation to deliver apples.

Option 4: A short futures position
- This matches the description: the farmer has agreed to deliver apples in 270 days, and a margin call today due to a price increase yesterday is characteristic of a short futures position incurring losses as the futures price moves against the short.
- In futures markets, daily marking to market means losses trigger margin calls if the position moves unfavorably, which is precisely what is described here.

Option 5: None of the options are correct
- Given that a short futures position coherently explains the margin call mechanism and the delivery obligation in 270 days, this option is not the best choice.

In summary, the scenario aligns with the mechanics of a short futures position: an obligation to deliver at a future date with losses realized via daily settlement leading to a margin call when the price moves unfavorably for the short. The other options either describe instruments with different margin practices or misalign with the delivery obligation described in the question.

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