Practice questions.pdf - Theory questions 1 List five differences between forward and futures contracts 2 Explain briefly the main idea and design of

Practice questions.pdf - Theory questions 1 List five...

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Theory questions: 1. List five differences between forward and futures contracts. 2. Explain briefly the main idea and design of the daily settlement process for futures. 3. Explain what basis risk is. Is basis risk always bad for hedgers? 4. What is cross hedging? 5. Explain how you can use a forward rate agreement for risk management purposes. Calculation questions: Problem 1 : A trader invests in a company by buying 1000 shares in June for $27 per share. She also buys 1000 put options for $5 each as insurance in case the stock drops sharply. The put options have a strike price of $27 and a maturity date of December. What is the gain or loss if the spot price on December is: a) $20, b) $27, c) $32 and d) $37? Problem 2 : A trader takes the long position and a hedge fund takes a short position on ten 1- month S&P 500 futures contracts at 1300. A single S&P 500 futures contract equals ($250) x (Index Value). The initial margin is $325,000 and the maintenance margin is $245,000 for both accounts. Ten trading days later, the futures price of the index drops to 1,260 triggering a margin call for the trader. What is the change margin of the account balance (indicate gain or loss) for: a) the trader and b) the hedge fund? What is the margin call for the trader?
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