On April 1, the spot price of the British pound was $1.86 and the price of the June futures contract was $1.85. During April the pound appreciated, so that by May 1 it was selling for $1.91. What do you think happened to the price of the June pound futures contract during April? Explain.
ANSWER. The price of the June futures contract undoubtedly rose. Here's why. The June futures price is based on the expectations of market participants as to what the spot value of the pound will be at the date of settlement in June. Since the spot value of the pound has risen in during April, the best prediction is that the future level of the pound will also be higher than it was on April 1. This expectation will undoubtedly be reflected in a June pound futures price that is higher on May 1 than it was on April 1.