Very easy if you have margin requirement you can

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very easy, if you have margin requirement you can enter markets o harder, need a lot of credit, not accessible, wholesale market 8. You buy futures contracts for Y100 million at a price of .92cents/Y. If the margin requirement is 20%, how much margin must you put up. Over the next week, the closing price each day is listed below. For each day calculate your gain or loss and the balance in your margin account. If maintenance margin is 80% of the original margin, will you receive any margin calls? If so, for how much?
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initial amt. in margin acct = 184k o 100m*.92 = 92,000,000 o 92,000,000*.2 = 18,400,000 / $184,000 total loss of 60k on futures Maintenance margin: minimum amount of equity that must be maintained in a margin account o 80% maintenance margin 184,000 * .8 = 147,200 put up a margin as collateral to protect the broker from loss on a contract Math: o (Actual price * 100 million) / 100 = cost @ actual price o Profit/ Loss on futures = (previous price + or – new price) (100 mil) o Accumulated amt. in marginal account = profit or loss +/- the previous marginal account balance o “each day the exchange debits the amount of the daily settlement from the loser’s margin account and credits it to the winner’s” Da y Actua l price Cost @ actual price Profit/Loss on futures Accumulate d amt. in margin acct Margin call amt. Total amt. in margin acct 1 0.93 930k +10k 194k 194k 2 0.90 900k -30k 164k 164k 3 0.90 900k 164k 164k 4 0.84 840k -60k 104k 43,200 104k 5 0.86 860k +20k 124k 167,200
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Forward transaction- two parties agree in advance on the terms of a trade to be executed later o Forward trade- parties agree to trade at a specified time in the future, at a price set now- trading in commodities, foreign exchange o Derivative- involves only payment of money- parties agree that they will pay or receive from each other at a set time in the future certain sums of money- PAYMENT DEPENDS ON THE VALUE AT THE ATIME OF SOME MARKET PRICE Long position- own good that you are selling later Short position- expected to buy in the future Rise in price is a gain if you’re in long position but a loss if you’re in short FUTURES: Hedging w forward trade, o Can agree with a bank to purchase foreign dollars at a set exchange rate Commitment to purchase or to sell the underlying asset at the contract price Alternatively, could enter futures contract o Buyer of future contact is in long position o Futures contact is a wager- the price is the price at which the market considers this to be a fair wager o Neither party pays anything to enter a futures contract o Locals provide futures market with liquidity- they use their own accounts to exchange on the floor o Replacement risk- default on contract by a counterparty- to protect against this the exchange guarantees fulfillment of all contracts (bc of this, traders don’t have to check credit of counterparty for a contract) reduces cost of trading o Can eliminate replacement risk by requiring daily settlements for change in future prices- CALLED MARKING TO MARKET. You will wind up with the same price if you waited to settle until the maturity date but marking to market eliminates replacement risk for both parties or the exchange o Settlement by offset- closing out a futures contract before maturity with an offsetting trade o Basis risk- imperfect match between futures contact and the position being hedged. Happens because Timing Contract size
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