BKM_Sol_Ch_17 - Chapter 17 - Futures Markets and Risk...

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Chapter 17 - Futures Markets and Risk Management Chapter 17 Futures Markets and Risk Management 1. a 2. d 3. Total losses may amount to $1,500 before a margin call is received. Each contract calls for delivery of 5,000 ounces. Before a margin call is received, the price per ounce can increase by: $1,500/5,000 = $0.30. The futures price at this point would be: $14 + $0.30 = $14.30 4. a. The required margin is 1408.90 x 250 x .10 = $35,222.50 b. Total gain = (1450 – 1408.90) x 250 = $10,275 Percentage return = 10275 / 35222.50 = .2917 or 29.17% c. Total loss = (1394.81 – 1408.90) x 250 = -$3,522.25 Percentage loss = -3522.25/35222.50 = -.10 or 10% loss 5. There is little hedging demand for cement futures because cement prices are relatively stable and, even in construction, cement is a small part of total costs. There is little speculative demand for cement futures because cement prices are fairly stable and predictable so that there is little opportunity to profit from price changes. 6. The ability to buy on margin is one advantage of futures. Another is the ease with which one can alter holdings of the asset. This is especially important if one is dealing in commodities, for which the futures market is far more liquid than the spot market so that transaction costs are lower in the futures market. 7. Short selling results in an immediate cash inflow, whereas the short futures position does not: Action Initial Cash Flow Cash Flow at Time T Short sale +P 0 –P T Short futures 0 F 0 – P T 17-1
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Chapter 17 - Futures Markets and Risk Management 8. a. . Action Initial Cash Flow Cash Flow at Time T Buy stock –S 0 S T + D Short futures 0 F 0 – S T Borrow S 0 –S 0 (1 + r) Total 0 F 0 + D – S 0 (1 + r) b. The net initial investment is zero, whereas the final cash flow is not zero. Therefore, in order to avoid arbitrage opportunities the equilibrium futures price will be the final cash flow equated to zero. Accordingly: F 0 = S 0 (1 + r) – D c. Noting that D = (d × S 0 ), we substitute and rearrange to find that: F 0 = S 0 (1 + r – d) 9. a. F 0 = S 0 (1 + r f ) = $150 × 1.06 = $159.00 b. F 0 = S 0 (1 + r f ) 3 = $150 × (1.06) 3 = $178.65 c. F 0 = S 0 (1 + r f ) 3 = $150 × (1.08) 3 = $188.96 10. a. Spot price 1400 Income yield (%) 1.5 Futures prices versus maturity Interest rate (%) 4 Today's date 37986 Spot price 1400 Maturity date 1 38030 Futures 1 1404.135 Maturity date 2 38127 Futures 2 1413.509 Maturity date 3 38308 Futures 3 1430.774 Time to maturity 1 0.119444 Time to maturity 2 0.388889 Time to maturity 3 0.880556 17-2
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Chapter 17 - Futures Markets and Risk Management b. This assumes a 5% dividend yield. Spot price 1400 Income yield (%) 1.5 Interest rate (%) 4 Today's date 1/1/2008 Spot price 1,400.00 Maturity date 1 2/14/2008 Futures 1 1,101.96 Maturity date 2 5/21/2008 Futures 2 1,106.39 Maturity date 3 11/18/2008 Futures 3 1,114.52 Time to maturity 1 0.12 Time to maturity 2 0.39 Time to maturity 3 0.88 Futures prices versus maturity 11. a.
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This note was uploaded on 08/25/2009 for the course FNCE 4330 taught by Professor Jianyang during the Spring '09 term at University of Colorado Denver.

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BKM_Sol_Ch_17 - Chapter 17 - Futures Markets and Risk...

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