1) It is March 9, and you have just entered into a short position in a soybean meal futures contract.

The
contract expires on July 9 and calls for the delivery of 100 tons of soybean meal. Further, because this
is a futures position, it requires the posting of a $3,000 initial margin and a $1,500 maintenance
margin; for simplicity, however, assume that the account is marked to market on a monthly basis.
Assume the following represent the contract delivery prices (in dollars per ton) that prevail on each
settlement date:

March 9 (initiation) $173.00

April 9 179.75
May 9 189.00
June 9 182.50
July 9 (delivery) 174.25

a. Calculate the equity value of your margin account on each settlement date, including any additional
equity required to meet a margin call. Also compute the amount of cash that will be returned to you
on July 9, and the gain or loss on your position, expressed as a percentage of your initial margin
commitment.
b. Assuming that the underlying soybean meal investment pays no dividend and requires a storage
cost of 1.5 percent (of current value), calculate the current (i.e., March 9) spot price for a ton of
soybean meal and the implied May 9 price for the same ton. In your calculations, assume that an
annual risk-free rate of 8 percent prevails over the entire contract life

2) Alex Andrew, who manages a $95 million large-capitalization U.S. equity portfolio, currently
forecasts that equity markets will decline soon. Andrew prefers to avoid the transactions costs of
making sales but wants to hedge $15 million of the portfolio’s current value using S&P 500 futures.
Because Andrew realizes that his portfolio will not track the S&P 500 index exactly, he performs a
regression analysis on his actual portfolio returns versus the S&P futures returns over the past
year.The regression analysis indicates a risk-minimizing beta of 0.88 with an R 2 of 0.92.

FUTURES CONTRACT DATA

S&P 500 futures price 1,000
S&P 500 index 999
S&P 500 index multiplier 250

a. Calculate the number of futures contracts required to hedge $15 million of Andrews portfolio,
using the data shown. State whether the hedge is long or short. Show all calculations.
b. Identify two alternative methods (other than selling securities from the portfolio or using futures)
that replicates the feature strategy in Part a. Contract each of these methods with the futures strategy.

3) A cattle farmer expects to have 120,000 pounds of live cattle to sell in three months. The live-cattle
futures contract on the Chicago Mercantile Exchange is for the delivery of 40000 pounds of cattle.
How can the farmer use the contract for hedging?
4) Explain how margins protects investors against the possibility of default.