Feedback the purpose of this question is to insure

This preview shows 47 out of 51 pages.

Feedback: The purpose of this question is to insure that the student understands the basic differences between futures and forward contracts. Difficulty: Easy 22-47
Image of page 47

Subscribe to view the full document.

Chapter 22 - Futures Markets 90. Distinguish between the short and long positions in futures transactions. The trader taking the long position commits to purchase the commodity on the delivery date. The trader taking the short position commits to delivery of the commodity at contract maturity. The trader in the long position "buys" the contract; the trader in short position "sells" the contract. However, no money exchanges hands when the contract is initiated. The trader holding the long position profits from price increases. The trader in the short position profits from price decreases. The profits and losses of the two positions exactly offset each other; the futures market, in the aggregate, is a zero sum game. The terms, short and long, have different meanings for different investment alternatives. Feedback: The purpose of this question is to insure that the student understands the meanings of these terms as related to the futures markets. Difficulty: Moderate 91. Discuss marking to market and margin accounts in the futures market. When opening an account, the trader establishes a margin account. The margin deposit may be cash or near cash, such as T-bills. Both sides of the contract must post margin. The initial margin is between 5 and 15% of the total value of the contract. The more volatile the asset, the higher the margin requirement. The clearinghouse recognizes profits and losses at the end of each trading day; this daily settlement is marking to market, thus proceeds accrue to the trader's account immediately; maturity date does not govern the realization of profits or losses. Feedback: Margin requirements and marking to market differ in the futures markets from that of the markets previously studied. This question is designed to ascertain whether the student understands these differences. Difficulty: Moderate 22-48
Image of page 48
Chapter 22 - Futures Markets 92. You purchased the following futures contract today at the settlement price listed in the Wall Street Journal . Answer the questions below regarding the contract. - What is the total value of the futures contract? - If there is a 10% margin requirement how much do you have to deposit? - Suppose the price of the futures contract changes as shown in the following table. - Enter the relevant information into the table. Show your calculations. - Explain why the account is marked-to-market daily. 22-49
Image of page 49

Subscribe to view the full document.

Chapter 22 - Futures Markets The answers are shown below. The total value of the contract is $9,174, as shown in the table. If there is a 10% margin requirement, you will have to deposit $917.40 in cash or securities. The contract is marked to market daily and profits or losses are posted in the account. The contract keeps pace with market activity and doesn't change value all at once at the maturity date. The marking-to-market process protects the clearinghouse because the margin percentage is calculated daily and if it falls below the maintenance margin a margin call can be issued. If the investor doesn't meet the call the clearinghouse can close out enough of the
Image of page 50
Image of page 51
You've reached the end of this preview.
  • Spring '10
  • HAMZA
  • oil futures

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern