Finance

Homework #1

1. Do the following exercises from the book:

Chapter 2: Exercise 2.28: Exercise 2.29

2.28: There is a margin call if $1000 is lost on the contract since the initial margin is $3000 and the maintenance margin is $2000. The price change that would lead to a margin call would be: 5000*4.50 = $22500 => $22500 + $1000 = $23500 => $23500/500 = $4.70 (or 470cents). If the price of wheat futures rises by 20 cents there will be a margin call. (22500 – 1500) / 500 = $4.20 => $1500 could be withdraw if the price fall to $4.20 or 420 cents per bushel.

2.29: If you take a long future position on June oil contract you would borrow $80 per barrel at 5% per annum. The interest accumulated in six months is 80*2.5% = $2. Then, if you take a short position on December oil contract the oil will be sold at $86 per barrel in December and $82 is repaid on the loan. This leads to a profit of $4 per barrel.

2. You have to make a 90,000,000 payment in Japanese Yen on close of business day, Friday, January 23d. You decide to hedge your risk with the futures contracts. Assume you that you enter into the futures position at a close of day on Tuesday, January 20th. Futures and spot data are provided in the file HW1_data.doc.

a. Describe the position you decide to enter (long or short).

Since you need to make payment in Japanese Yen, you need to enter a long position for Japanese Yen.

b. Describe the contract (what month, and what quantity).

Japanese Yen Future contract size = 12.5 million Yen

Need to long 90/12.5 = 7.2 contracts of Yen future for MAR 15.

c. Document the gain or loss due to marking to market every day that your position is open.

January 21th: gain= 0.000063 * 7 * 12,500,000 = $5512.5

January 22th: gain= 0.008444+0.000053-0.008483) * 7 * 12,500,000 = $1225

January 23th: loss = (-0.000053) * 7 * 12,500,000 = $-4637.5