SolCh22 - Chapter 22 - Futures Markets CHAPTER 22: FUTURES...

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Chapter 22 - Futures Markets 22-1 CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support the futures market would not materialize. 2. The ability to buy on margin is one advantage of futures. Another is the ease with which one can alter 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. 3. 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 4. a. False. For any given level of the stock index, the futures price will be lower when the dividend yield is higher. This follows from spot-futures parity: F 0 = S 0 (1 + r f – d) T b. False. The parity relationship tells us that the futures price is determined by the stock price, the interest rate, and the dividend yield; it is not a function of beta. c. True. The short futures position will profit when the market falls. This is a negative beta position. 5. The futures price is the agreed-upon price for deferred delivery of the asset. If that price is fair, then the value of the agreement ought to be zero; that is, the contract will be a zero-NPV agreement for each trader. 6. Because long positions equal short positions, futures trading must entail a “canceling out” of bets on the asset. Moreover, no cash is exchanged at the inception of futures trading. Thus, there should be minimal impact on the spot market for the asset, and futures trading should not be expected to reduce capital available for other uses.
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Chapter 22 - Futures Markets 22-2 7. a. The closing futures price for the March contract was 1,477.20, which has a dollar value of: $250 × 1,477.20 = $369,300 Therefore, the required margin deposit is: $36,930 b. The futures price increases by: 1,500.00 – 1,477.20 = 22.80 The credit to your margin account would be: 22.80 × $250 = $5,700 This is a percent gain of: $5,700/$36,930 = 0.1543 = 15.43% Note that the futures price itself increased by only 1.543%. 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%. 8. a. F 0 = S 0 (1 + r f ) = $150 × 1.06 = $159 b. F 0 = S 0 (1 + r f ) 3 = $150 × 1.06 3 = $178.65 c. F 0 = 150 × 1.08 3 = $188.96 9. a. Take a short position in T-bond futures, to offset interest rate risk. If rates increase, the loss on the bond will be offset to some extent by gains on the futures. b. Again, a short position in T-bond futures will offset the interest rate risk. c.
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SolCh22 - Chapter 22 - Futures Markets CHAPTER 22: FUTURES...

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