A takes a long position by buying a December gold futures contract in January, and
B at the same time takes a short position by selling the contract. The orders from
B are matched and the agreed price for December gold is $1000.
Assume that the December gold futures price goes like this:
January = $1000 → ... → November = $800 → December = $700
In November, at the end of the day, the balance in the
A's margin account would be reduced by $200, and the
B's margin account would be increased by $200. (Daily settlement)
In November, if
A decides to close out the position by selling the contract. The futures price on that day is $800, so
A would have a cumulative loss of $200 by closing out.
- Now what happens to
Bholds the contract until December, he would have the right to sell the gold at $1000 while the price in the market is only (or should be very closed to) $700, meaning that
Bshould gain $300. But his margin account has increased by only $200. Where would an extra $100 come from? To whom would
Bsell the gold?