Posted: June 21st, 2016

A soybean oil futures contract of CBOT covers 60,000 pounds of soybean oil. The initial margin is $2,025 and the maintenance margin is $1,500. Suppose you are going to short five August soybean futures contracts for the price of $0.32 per pound.

2. (12 marks) A soybean oil futures contract of CBOT covers 60,000 pounds of soybean oil. The initial margin is $2,025 and the maintenance margin is $1,500. Suppose you are going to short five August soybean futures contracts for the price of $0.32 per pound.

a. How much margin deposit do you need to put up? (2 marks)

b. At what price would there be a margin call? (5 marks)

c. If the futures price rises by 5% next day, what would be your loss and margin variation? (3 marks)

d. How can you close your position in May? (2 marks)

3. (8 marks) Suppose you have a short position in a forward contract for 500 troy ounces of gold at $920. The contract has 10 months to expire. Currently, the spot price of gold is $922, and the risk-free rate and the rate of storage cost are 8% and 3% per annum, respectively. Both rates are continuously compounded. What is the value of the contract to you?
4. (10 marks) Consider the 90-day futures on stock ABC. Currently, the share price of ABC is $80 per share. The stock is expected to pay a dividend of $1.50 in one month’s time. Assume that the simple interest rate is 8% per year, and that there are 30 days in a month. Determine the price of the futures and the dollar cost of carry, assuming no arbitrage opportunities are present.

5. (8 marks) You buy 500 shares of stock ABC at $60 per share and short five September futures contracts at $62 per share. One contract is for 100 shares. If you close your position on June 1 when the basis is $5, how much money can you get?

6. (10 marks) Currently, the spot price of silver is $9 per ounce and the one-year futures price of silver is $11. The storage costs are $0.24 per ounce per year payable at the end of the year. Assume the simple interest rate is 10% per annum.

a. What is the “fair” one-year futures price of silver? What is the cost of carry? (4 marks)

b. How can you make an arbitrage profit? Show your transactions in details using a numerical example. (6 marks)

7. (12 marks) Today is February 15. Suppose you are an oil dealer and hold a position of 200,000 barrels of crude oil. You hedge by trading May crude oil futures, each of which is on 10,000 barrels. The hedge will be on until April 15. The current spot price and the May futures price are $20.50 and $20.00 per barrel, respectively. For simplicity, a hedge ratio of 1 is used.

a. How many contracts will you use? Long or short? (3 marks)

b. What is the basis today? (3 marks)

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