Homework Problems: Forward & Futures Markets

(Fin. 338)

1.

An investor goes long (purchases) two (2) cotton futures contracts on April 5 for delivery on July 10. The purchase price under the contract agreement is 0.54 cents (54 cents) a pound and the contract size is 50,000 pounds. The initial margin requirement level is 5.5%, with a maintenance level requirement of 3.25%. a. Determine how much the investor must put down as an initial margin to purchase 2 cotton contracts. b. Below what dollar value will the investor’s margin account receive a margin call? c. On May 29, the price of July cotton stands at .58 (58 cents) a pound. At that point the investor decides to close out the two contracts with reverse trade positions. 1.) 2.) 3.) What is the dollar amount of the investor’s profit/loss from closing out the cotton positions? What is the HPY (holding period yield) for the cotton contracts at the time of their closeout? What is the return on investment the investor received based upon the investor’s total investment (here, the initial margin amount)?

2.

Max Fields is a commodity trader who trades for his own account. Max decides to go short (sell) November heating oil on August 15, believing that the futures price for the November contract is too high. Currently, the futures price for November heating oil is going for $1.48 a gallon. Heating oil futures contracts involve 5000 gallons and have an initial margin of 6.75%, with a maintenance margin level of 3.45% (below which a maintenance call will occur). Assume Max takes a position involving 3 contracts. a. How much must Max put down to meet his initial margin requirement? b. On August 22 heating oil futures prices for November delivery drop to $1.45 a gallon. Determine the profit or loss Max has made on his November heating oil contracts. c. What is the current balance in Max’s margin account as of the end of trading on August 22? d. At the end of trading on September 5, the futures price for November heating oil stands at $1.55 per gallon. 1.) 2.) Determine the account balance of Max’s margin account as of the end of the day. Will Max face a margin call? If so, how much must he add to his account in the form of variance margin to meet the margin call?

Homework Problems: Forward & Futures (Fin. 338)

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e. On September 7, the futures price for November heating oil rises to $1.57 per gallon. At this point Max decides to enter a reverse trade and close out (unwind) his position. 1.) 2.) 3.) Determine the short position’s HPY for the November futures contract at the time of the reverse trade. Determine Max’s total profit/loss realized on his November heating oil position. (Remember, he has held 3 contracts.) What is Max’s return on investment which he realized by taking his November futures position in heating oil?

3.

Suppose silver is currently selling at $4.23 per ounce in the spot market. Assume that the current risk-free rate (implied repo rate) is 3.75% and that silver contracts involve 5000 ounces each. a. Ignoring carrying costs and cash flows, what should the 6 month (180 days) silver futures contract be selling for according to the cost-of-carry model? b. If the 6 month (180 day) futures contract for silver is selling for $4.40 per ounce, what should you, as an investor, do? What profit will you realize if you decide to work with one (1) silver contract?

4.

Again, suppose silver is currently selling at $4.23 per ounce in the spot market. Assume as well that the current risk-free rate (implied repo rate) is 3.75% and that silver contracts involve 5000 ounces each. Also, now assume that carrying costs (storage and insurance) for silver are accessed at .31% (0.0031) per ounce price. a. Including carrying costs, what should the 6 month (180 days) silver futures contract be selling for according to the cost-of-carry model? b. If the 6 month (180 day) futures contract for silver is selling for $4.18 per ounce, what should you, as an investor, do? c. What arbitrage profit will you realize if you decide to work with two (2) silver contracts?

5.

On June 15, the spot price for corn stands at $5.20 a bushel, while the October futures contract for corn stands at $5.32 per bushel. a. Determine what the basis is for corn on June 15. b. Based upon this basis value, would you expect normal backwardation or contango to occur in the futures market as the October corn futures contract moves toward settlement? c. The following month (July 10) the spot price for corn goes to $5.25 per bushel, while the October futures contract price moves to $5.10 per bushel. 1.) 2.) 3.) Determine the basis value for corn on July 10. Has the basis for corn strengthened or weakened between June 15 and July 10? (Refer above to part a.) Based upon this new basis value for July 10, would you expect normal backwardation or contango to occur in the futures market as the October corn futures contract moves toward settlement?

Homework Problems: Forward & Futures (Fin. 338)

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Answers to Homework Problems: Forward & Futures Markets
(Fin. 338)

1. a. $2970 b. $1755 c. 1.) 2.) 3.) 2. a. $1498.50 b. $450 c. $1948.50 d. 1.) $448.50 2.) $1050 (variance margin needed) e. 1.) – 6.08% 2.) - $1350 3.) – 52.97% 3. a. $21,550 (at a price of $4.31/oz.) b. cash-and-carry arbitrage (profit: $453.44) 4. a. $21,600 (at a price of $4.32/oz.) b. reverse cash-and-carry arbitrage needed c. $1293.13 5. a. – 0.12 b. c. 1.) 0.15 2.) 3.)

+ $4000 7.41% 135%

Homework Problems: Forward & Futures (Fin. 338)

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