BBMF2073 FOREX AND DERIVATIVES

Tutorial 2: Forward and Futures Markets

Question 1

You have gone long FOUR September CPO futures contracts. The futures price is now RM1,800 per
ton. Assuming a counterparty has the same total value, determine the daily marking-to-market
adjustment to both accounts and the balance on the 5th day.

Contract size = 25 tons

Initial margin = 10% of total value

Maintenance margin = 70% of initial margin

Day Futures sett. Your account Balance Counterparty Balance

price (RM) adjustment adjustment
0 1,800
1 1,820
2 1,790
3 1,770
4 1,800
5 1,810

Question 2

You have gone Short TEN June copper futures contracts. The futures price is RM2,000 per ton. Given
the following information, determine the daily marking-to-market adjustment to both your and the
counterparty's account. (Assuming same total value.)

Contract size: 10 tons per contract

Initial margin: 10% of total value

Maintenance margin: 70% of initial margin

Day Futures Sett. Price (RM)

0 2,000
1 2,010
2 1,980
3 1,970
4 2,000
5 2,020
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Question 3

Suppose it is June 2006; you expect the price of rice to increase over the next 3 months. (Assume
rice futures are traded on MDEX on the typical 3-month cycles)

Initial margin= 10%

Contract size= 5000 kg

Current futures settlement price= RM3 per kg

Transaction cost= RM40 per contract (per round trip)

a. Given the information above and you have RM10,000 to invest, what can you do to take
advantage of your expectation?

b. Suppose rice goes to RM3.50 per kg over the next 3 months. What is your net return in RM and %
given your position in (a)?

c. What would you net return in RM and % be if rice is at RM2.25 in 3 months?

d. Explain why the results in (b) and (c) are so different.

Question 4

A farmer shorts cocoa futures contracts for 500 tons at RM6,000 per ton. The exchange requires him
to post RM300,000 as initial margin. If the maintenance margin is RM250,000, what price change
(per ton) would lead to a margin call? What price change could lead to RM30,000 being credited to
his margin account?

Question 5

Suppose that on 15 September 2000, you sell €100,000 forward for delivery on 15 January 2001. On
15 September 2000, the spot price of a € is $0.95 (exchange rate is $0.95/€), and the forward price
for delivery 4 months later is $0.92/€. Then, on 15 January 2001, the spot price of a € is $0.93, and
the forward price for delivery 4 months later (for delivery on 15 May 2001) is $0.94/€. Determine
your profit or loss on the transaction.

Question 6

Suppose you bought one gold futures contract for August delivery at its 2 April settlement price of
$279/oz. Assume that both the last trading date and the delivery date are 27 August. Assume that
your borrowing and lending rates are 8% per year, and that you borrow to meet any mark-to-market
cash outflows and lend any mark-to-market losses.
 BBMF2073 FOREX AND DERIVATIVES

a. If the gold futures price remains unchanged until 26 August, then falls to $250/oz. on 27 August,
what is your profit or loss per ounce?

b. If, instead, the gold futures price falls to $250/oz. On 3 April and stays there until the delivery
date, what is your profit and loss?

c. If, instead, the gold futures price rises to $420/oz. On 3 April stays there, and then falls to
$250/oz on 7 August then what is your profit or loss?

d. Given that money has time value, which of the foregoing price scenarios is most attractive: a, b,
or c? Briefly explain why.

Question 7

A corporate treasurer who was long 3 month futures contracts on British pound sterling for 400,000
pounds subsequently goes short 3 month pound forward contracts for 400,000 pounds. Assume the
exchange rate in both cases is equal. What is his net position in British pounds?