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2. Futures and Forward Markets
2.1. Institutions
1. (Hull 2.3) Suppose that you enter into a short futures contract to sell
July silver for $5.20 per ounce on the New York Commodity Exchange. The size of the contract is 5,000 ounces. The initial margin is $4,000 and the maintenance margin is $3,000. What change in the futures price will lead to a margin call?
5,000($5.20¡F)=¡$1,000
26,000¡5,000F=¡1,000
F=
27,000
5,000 =5.40 i.e., a price change of+$0.20per ounce.
What happens if you do not meet the margin call?
If you don't meet the margin call, your position gets liquidated. 1
2. Futures and Forward Markets
2.1. Institutions
2. (Hull 2.11) An investor enters into two long futures contracts on frozen
orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract. What price change would lead to a margin call? There is a margin call if $1,500 is lost on one contract.
15,000(F¡$1.60) =¡$1,500
15,000F¡24,000 =¡1,500
F=
22,500
15,000
=1.50 This happens if the futures price falls to $1.50 per pound. Under what circumstances could $2,000 be withdrawn from the margin ac- count? $2,000 can be withdrawn from the margin account if the value of one contract rises by $1,000.
15,000(F¡$1.60) = $1,000
15,000F¡24,000 = 1,000
F=
25,000
15,000
=1.6667 This happens if the futures price rises to $1.6667 per pound. 2
2. Futures and Forward Markets
2.1. Institutions
3. (Hull 2.15) At the end of one day a clearinghouse member is long 100
contracts, and the settlement price is$50,000 per contract. The original margin is $2,000 per contract. On the following day the member becomes responsible for clearing an additional 20 long contracts, entered into at a price of $51,000 per contract. The settlement price at the end of this day is $50,200. How much does the member have to add to its margin account with the exchange clearinghouse? $36,000.
From the clearinghouse to the member:
100 old contracts with ($50,200-$50,000) settlement each.
From the member to the clearinghouse:
20 new contracts with $2,000 original margin each.
From the member to the clearinghouse:
20 new contracts with ($50,200-$51,000) settlement each.
3
2. Futures and Forward Markets
2.1. Institutions
4. (Baby Hull 2.24, Papa Hull 2.26) A company enters into a short futures
contract to sell 5,000 bushels of wheat for 250 cents per bushel. The initial margin is $3,000 and the maintenance margin is $2,000. What price change wouldleadtoamargincall? There is a margin call if $1,000 is lost on the contract.
5,000(¡F+$2.50) =¡$1,000
5,000F¡12,500 = 1,000
F=
13,500
5,000 =2.70 This will happen if the futures price rises to $2.70 per bushel. Under what circumstances could $1,500 be withdrawn from the margin ac- count?
5,000(¡F+$2.50) = $1,500
5,000F¡12,500 =¡1,500
F=
11,000
5,000 =2.20 $1,500 can be withdrawn if the futures price falls to $2.20 per bushel. 4
2. Futures and Forward Markets
2.2. Pricing
1. (Baby Hull 5.9, Papa Hull 3.11) A one-year long forward contract on a
nondividend-paying stock is entered into when the stock price is $40 and the risk-free rate of interest is 10 percent per annum with continuous compound- ing. (a) What are the forward price and the initial value of the contract? F=Se rT =40e 0.1 12 12 =44.21 f=(F¡K)e rT =0 (b) Six months later, the price of the stock is $45 and the risk-free interest rate is still 10 percent. What are the forward price and the value of the forward contract? F=Se rT =45e 0.1 6 12 =47.31 f=(F¡K)e rT =(47.31¡44.21)e 0.1 6 12 =2.95 5
2. Futures and Forward Markets
2.2. Pricing
2. (Baby Hull 5.11, Papa Hull 3.13) Assume that the risk-free interest rate
is 9 percent per annum with continuous compounding and that the dividend yield on a stock index varies throughout the year. In February, May, August, and November, it is 5 percent per annum. In other months, it is 2 percent per annum. Suppose that the value of the index on July 31 is 300. What is the futures price for a contract deliverable on December 31? average dividend yield (5+2+2+5+2) 5 =3.2% F=Se (rq)T =300e (0.090.032) 5 12 =307.34 6
2. Futures and Forward Markets
2.2. Pricing
3. (Baby Hull 5.13, Papa Hull 3.15) Estimate the dierence between short-
term interest rates in Mexico and the United States on February 4, 2004 from the following information: deliverysettle ($/Peso)
Mar.08920
June.08812
F=Se (rr f )T F T=Se (rr f )T (r¡r f =F(r¡r f
0.08812¡0.08920
0.25=0.0.08920(r¡r
f (r¡r f )=¡0.0484 7
2. Futures and Forward Markets
2.2. Pricing
4. (Baby Hull 5.23, Papa Hull 3.24) A stock is expected to pay a dividend
of $1 per share in two months and infive months. The stock price is $50 and the risk-free rate of interest is 8 percent per annum with continuous compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock. (a) What are the forward price and the initial value of the forward contract? I=1e 0.08 2 12 +1e 0.08 5 12 =0.9868 + 0.9672 =1.9540
F=(S¡I)e
rT =(50¡1.9540)e 0.08 6 12 =50.01 f=(K¡F)e rT =0 (b) Three months later, the price of the stock is $48 and the risk-free rate of interest is still 8 percent per annum. What are the forward price and the value of the short position in the forward contract? I=1e 0.08 2 12 =0.9868
F=(S¡I)e
rT =(48¡0.9868)e 0.08 3 12 =47.96 8
2. Futures and Forward Markets
2.2. Pricing
4. (b) (Continued)
f=(K¡F)e rT =(50.01¡47.96)e 0.08 3 12 =2.01 9
2. Futures and Forward Markets
2.2. Pricing
5. (Baby Hull 5.25, Papa Hull 3.26) A company that is uncertain about the
exact date when it will pay or receive a foreign currency may try to negotiate with its bank a forward contract that specifies a period during which delivery can be made. The company wants to reserve the right to choose the exact delivery date tofitinwithitsowncashflows. Put yourself in the position of the bank. How would you price the product that the company wants? It is likely that the bank will price the product on assumption that the company chooses the delivery date least favorable to the bank. If the foreign interest rate is higher than the domestic interest rate then,
1. The earliest delivery date will be assumed when the company has a
long position.
2. The latest delivery date will be assumed when the company has a short
position. If the foreign interest rate is lower than the domestic interest rate then,
1. The latest delivery date will be assumed when the company has a long
position.
2. The earliest delivery date will be assumed when the company has a
short position. 10
2. Futures and Forward Markets
2.3. Hedging Strategies
1. (Baby Hull 3.16, Papa Hull 4.16) The standard deviation of monthly
changes in the spot price of live cattle is 1.2 (in cents per pound). The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 1.4. The correlation between the futures price changes and the spot price changes is 0.7. It is now October 15. A beef producer is committed to purchasing 200,000 pounds of live cattle on November 15. Thequotesdbs_dbs10.pdfusesText_16
[PDF] Problem 99 Suppose that a European call option to buy a - CSUN