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# bkmsol_ch22 - CHAPTER 22 FUTURES MARKETS 1 a The closing...

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CHAPTER 22: FUTURES MARKETS 1. a.The closing spot price was 874.74. The dollar value of stocks traded is thus: \$250 × 874.74 = \$218,685 The closing futures price for the June contract was 872.20, which has a dollar value of: \$250 × 872.20 = \$218,050 Therefore, the required margin deposit is \$21,805. b. The futures price increases by: 880.00 – 872.20 = 7.80 The credit to your margin account would be: 7.80 × \$250 = \$1,950 This is a percent gain of: \$1,950/\$21,805 = 0.0894 = 8.94% Note that the futures price itself increased by only 0.894%. 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%. 2. 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. 3. 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. 4. 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 5. 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 22-1

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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. 6. 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 7. As S increases, so will F. You should buy the futures. A long position in futures is better than buying the stock since you get the advantage of buying on margin. 8. 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.
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bkmsol_ch22 - CHAPTER 22 FUTURES MARKETS 1 a The closing...

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