ch_18_sol - CHAPTER 18 FUTURES MARKETS 1 2 3 a d b Total...

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CHAPTER 18: FUTURES MARKETS 1. a. 2. d. 3. b. Total losses may amount to $525 before a margin call is received. Each contract calls for delivery of 5,000 ounces. The price per ounce can drop by $525/5,000 = $.105 (or $.11 given that prices are quoted only to the penny) before the margin call goes out. The futures price at this point would be $8 - $.11 = $7.89. 4. a. The closing price for the spot index was 1,301.84. The dollar value of stocks is thus $250 × 1, 301.84 = $325,460. The closing futures price for the September contract was 1,297.20, which has a dollar value of 1,297.20 × $250 = $324,300 and therefore requires a margin of $32,430. b. The futures price increases by 1,350 - 1,297.20 = 52.80. The credit to your margin account would be 52.80 × $250 = $13,200, which is a percent gain of $13,200/$32,430 = 40.7%. Note that the futures price itself increased only by 4.07%. c. Following the reasoning in part (b), any change in F is magnified by a ratio of l/ (margin requirement). This is the leverage effect. The return will be –10%. 5. There is little hedging demand for cement futures since it is a small component of a typical individual’s consumption basket. There is little speculative demand for cement futures, since cement prices are fairly stable and predictable. 6. The ability to buy on margin is one advantage of futures. Another is the ease of altering one’s 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. 7. Short selling results in an immediate cash inflow, whereas the short futures position does not: Action Initial CF Final CF Short sale +P 0 –P T Short futures 0 F 0 – P T 18-1
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8. a. Action Initial CF Final CF Buy shares –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 cash flow is not zero. Therefore 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.
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ch_18_sol - CHAPTER 18 FUTURES MARKETS 1 2 3 a d b Total...

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