EFB344 Tutorial 5 Questions PDF

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EFB344 Risk Management and Derivatives Tutorial 5:

Forwards and Futures 1

Readings:

Hull et al. (2014) Fundamentals of Futures and Options, Ch. 1: 1.1 – 1.4, Ch. 2 and Ch. 3

_________________________________________________________________________________ General Questions: Question 1 What is the primary purpose of the daily settlement of futures contracts?

Question 2 Why are both the buyer and the seller of the futures contract required to establish a margin account?

Question 3 Why might a futures broker require the services of another futures broker when completing customer transactions in the futures market?

Question 4 My portfolio has a beta of 1. Let VA be the value of the portfolio and VF is the notional value of a S&P200 futures contract (F0,T x $25). If I sell perfectly hedged.

V A/V F

futures, discuss whether my portfolio is

Question 5 The beta of an ASX SPI200 futures contract is assumed to be equal to 1 and betas are linearly additive. If I have a portfolio beta of 1.5, why will the purchase of ASX SPI200 futures increase my portfolio beta above 1.5 when the two exposures being combined together have betas of 1 and 1.5?

Question 6 What is the difference between the over-the-counter and the exchange-traded market? What are the bid and offer quotes of a market maker in the over-the-counter market?

Question 7 Suppose you enter into a short futures contract to sell December fine wool for AUD 15.00 per kilogram on the ASX. The size of the contract is 2500 kilograms. The initial margin is $4000, equating to the maintenance margin. If the price of the fine wool futures increases to AUD 15.75 per kilogram, what will be the balance of the margin account? Determine the amount of the margin call, if appropriate.

Question 8 Suppose that in September 2012 an American company takes a long position in a contract on May 2013 crude oil futures. It closes out its position in March 2013. The futures price (per barrel) is $68.30 when it enters into the contract, $70.50 when it closes out the position, and $69.10 at the end of December 2012. One contract is for delivery of 1000 barrels. What is the company’s profit? When is it realised? How is it taxed if it is: (a) a hedger, and (b) a speculator? Assume that the company has a 31 December year end....