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Chapter 2 solutions

# Chapter 2 solutions - Problem 2.11 A trader buys two July...

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Problem 2.11. A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is \$6,000 per contract, and the maintenance margin is \$4,500 per contract. What price change would lead to a margin call? Under what circumstances could \$2,000 be withdrawn from the margin account? There is a margin call if more than \$1,500 is lost on one contract. This happens if the futures price of frozen orange juice falls by more than 10 cents to below 150 cents per lb. \$2,000 can be withdrawn from the margin account if there is a gain on one contract of \$1,000. This will happen if the futures price rises by 6.67 cents to 166.67 cents per lb. Problem 2.16. On July 1, 2010, a Japanese company enters into a forward contract to buy \$1 million with yen on January 1, 2011. On September 1, 2010, it enters into a forward contract to sell \$1 million on January 1, 2011. Describe the profit or loss the company will make in dollars as a function of the forward exchange rates on July 1, 2010 and September 1, 2010.

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