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Date Submitted: 03/26/2012 06:02 PM
International Capital Markets
The following data applies to questions 1-12.
Suppose an exchange creates a new contract on 1000 tons of salt. During the first
week, three people trade it, called A, B and C. On the first day,
Monday
A buys 10 contracts at $45.60 per ton
B sells 6 contracts at $45.60
C sells 4 contracts at $45.60
Settlement price: $46.00
Tuesday
A sells 3 contracts at $47.
B buys 3 contracts at $47.
C does not trade at all.
Settlement price = $48.
Wednesday
No one trades at all.
Settlement price: $47.5. (Exchange determines settlement price based on bid/ask at
the close of trading.)
Thursday
A buys 3 contracts at $47.
A sells 3 contracts at $47.50
B sells 3 contracts at $47
C buys 3 contracts at $47.50.
Settlement: $47.50 (same as previous day)
1. On Monday, what is the volume and open interest?
volume = 10 contracts, open interest = 10
2. Assume A, B and C all post letters of credit to satisfy their initial margin
requirements. On Tuesday morning, the participants make (or receive) their
variation margin from Monday. How much does each trader pay or receive?
A has a profit of $0.40 × 10 × 1000 = $4000.
B has a loss of $0.40 × 6 ×1000 = -$2,400.
C has a loss of $0.40 × 4 ×1000 = -$1600.
3. On Tuesday, what is the volume and open interest?
Volume = 3 contracts. Open interest declines to 7.
4. Wednesday morning, how much variation margin does each trader pay or receive?
A: 3 × (47-46) × 1000 + 7 × (48-46) × 1000 = +$17,000.
B: 3 × (46-47) × 1000 + 3 × (46-48) × 1000 = - $9,000.
C: –(46-48) × 4 × 1000 = -$8000.
5. On Wednesday, what is the volume and open interest?
Volume = 0. Open interest = 7.
6. Thursday morning, how much variation margin does each trader pay or receive?
A: 7 × (47.5 – 48) × 1000 = -$3500.
B: 3 × (48 – 47.5) × 1000 = +$1500.
C: 4 × (48 – 47.5) × 1000 = +$2000....