Futures+Markets+Solution

Futures+Markets+Solution - FINA 3104 Practice Problems Fall...

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1 FINA 3104 Practice Problems Fall 2011 Futures Markets (Suggested Solution) 1. True or False (a) If a trader holding a long position in futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is the clearinghouse. Solution: True. If the long position fails to pay the futures price at maturity, then the clearinghouse does not receive the money as it is taking the short position of the contract. But at the same time the clearinghouse has to meet the obligations of all other contracts because it is serving as an intermediary. (b) The terms of forward contracts such as the forward price and the delivery date are specified by the clearinghouse. Solution: False. Forward contracts are not traded in clearinghouses, which serve as an intermediary (for futures contracts). The terms of forward contracts are specified by the two parties directly. (c) If futures prices go up, the buyer of a futures contract can receive a margin call. Solution: False. If futures prices go up, the long position of a futures contract makes a profit and the value of the margin account will be higher. You receive a margin call only when the value of the margin account falls below the maintenance margin, which cannot happen if futures prices are higher than F 0 . (d) The higher the riskfree rate, the larger the difference between current spot and futures prices (holding other parameters unchanged). Solution: True. If the riskfree rate is higher, it is more costly to borrow and the cost of carry is larger. Since the current spot and futures prices differ by the cost of carry, the difference increases in the riskfree rate. That is, F 0 = S 0 (1+ r f + c-d ), where the cost of carry is r f + c-d . Spot and futures prices differ by more if the riskfree rate r f is higher. 2. Margin Accounts
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Futures+Markets+Solution - FINA 3104 Practice Problems Fall...

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