Assignment 5 Solutions

Assignment 5 Solutions - ECON 305 A01/A02 Assignment 5 Due:...

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ECON 305 A01/A02 Assignment 5 Due: Tuesday November 8, 2011 at 3 pm in the ECON 305 assignment drop box Please be sure to label your assignment with your name, student number and section number. Answer all questions concisely but completely. 1a) You expect that the price of cotton will rise significantly over the year and want to take as large a position as you can in the market but your funds are limited. How could you use the futures market to your advantage? You should buy as many one-year cotton futures contracts as you can afford. This will depend on the margin payment required. As the margin payment is a fraction of the value of the contract, you will leverage your exposure to market movements. The value of the futures contracts will rise in lockstep with the price of cotton. 1b) Suppose you have $5,500 to invest and you follow the strategy you design from part a). Cotton is selling at $1 per pound and the initial margin requirement for a futures contract at NYMEX is $5,500. The size of the cotton contract is 50,000 lbs. Calculate
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Assignment 5 Solutions - ECON 305 A01/A02 Assignment 5 Due:...

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