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Discussion 04(1) - HEDGING RISK CORPFIN 7042NA Treasury and...

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HEDGINGRISKCORPFIN 7042NA Treasury and Financial Risk Management MTopic 4HEDGINGRISKQuestion 1What are position limits in futures markets? Why do we need these? Are they effectivefor the objective you state, or can you think of better ways to achieve the objective?Question 2What are the different ways in which futures contracts may be settled? Explain whythese exist.Question 3Identify the main institutional differences between futures contracts and forwardcontracts.Question 4An investor enters into a short futures position in 10 contracts in gold at a futures price of$276.50 per oz. The size of one futures contract is 100 oz. The initial margin per contractis $1,500, and the maintenance margin is $1,100.(a)What is the initial size of the margin account?(b)Suppose the futures settlement price on the first day is $278.00 per oz. What isthe new balance in the margin account? Does a margin call occur? If so, assumethat the account is topped back to its original level.(c)The futures settlement price on the second day is $281.00 per oz. What is thenew balance in the margin account? Does a margin call occur? If so, assumethat the account is topped back to its original level.(d)On the third day, the investor closes out the short position at a futures price of$276.00. What is the final balance in his margin account?(e)

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