2. Today is 04/30/20xx. You have a unit of commodity to sell in a month, and you would like to lock the price at $100 by hedging with futures. Since you are not selling a professionally traded commodity, you take a modified version of futures contract which is marked to the market every week as opposed to every day. The margin account yields 5.2% per annum compounded weekly, with a margin requirement (opening balance) of $40 and maintenance margin (minimum balance) of $20. The futures price of the commodity you are selling is $110 on 05/01, $104 on 05/08, $98 on 05/15, $94 on 05/22, $102 on 05/29. Assume you enter the contract today and will make the delivery on 05/30, using the 05/29 price. Assume one year consists of 52 weeks. (a) (30 pt) Fill out the cash flow table below, showing all the calculation details for (1) - (15). Profit is the money you receive, so a cash outflow is negative profit. Date Futures Price Profit Interest Balalce 04/30 $100 0 0 $40 05/01 $110 (1) (2) (3) 05/08 $104 (4) (5) (6) 05/15 $98 (7) (8) (9) 05/22 $94 (10) (11) (12) 05/29 $102 (13) (14) (15) (b) (20 pt) If the margin requirement were $20 and maintenance margin $10, what would happen to the futures contract?
2. Today is 04/30/20xx. You have a unit of commodity to sell in a month, and you would like to lock the price at $100 by hedging with futures. Since you are not selling a professionally traded commodity, you take a modified version of futures contract which is marked to the market every week as opposed to every day. The margin account yields 5.2% per annum compounded weekly, with a margin requirement (opening balance) of $40 and maintenance margin (minimum balance) of $20. The futures price of the commodity you are selling is $110 on 05/01, $104 on 05/08, $98 on 05/15, $94 on 05/22, $102 on 05/29. Assume you enter the contract today and will make the delivery on 05/30, using the 05/29 price. Assume one year consists of 52 weeks. (a) (30 pt) Fill out the cash flow table below, showing all the calculation details for (1) - (15). Profit is the money you receive, so a cash outflow is negative profit. Date Futures Price Profit Interest Balalce 04/30 $100 0 0 $40 05/01 $110 (1) (2) (3) 05/08 $104 (4) (5) (6) 05/15 $98 (7) (8) (9) 05/22 $94 (10) (11) (12) 05/29 $102 (13) (14) (15) (b) (20 pt) If the margin requirement were $20 and maintenance margin $10, what would happen to the futures contract?
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 3SBD
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Transcribed Image Text:2. Today is 04/30/20xx. You have a unit of commodity to sell in a month, and you would like
to lock the price at $100 by hedging with futures. Since you are not selling a professionally
traded commodity, you take a modified version of futures contract which is marked to the
market every week as opposed to every day. The margin account yields 5.2% per annum
compounded weekly, with a margin requirement (opening balance) of $40 and maintenance
margin (minimum balance) of $20. The futures price of the commodity you are selling is
$110 on 05/01, $104 on 05/08, $98 on 05/15, $94 on 05/22, $102 on 05/29. Assume you
enter the contract today and will make the delivery on 05/30, using the 05/29 price. Assume
one year consists of 52 weeks.
(a) (30 pt) Fill out the cash flow table below, showing all the calculation details for (1) -
(15). Profit is the money you receive, so a cash outflow is negative profit.
Date
Futures Price Profit Interest
Balalce
04/30
$100
0
0
$40
05/01
$110
(1)
(2)
(3)
05/08
$104
(4)
(5)
(6)
05/15
$98
(7)
(8)
(9)
05/22
$94
(10)
(11)
(12)
05/29
$102
(13)
(14)
(15)
(b) (20 pt) If the margin requirement were $20 and maintenance margin $10, what would
happen to the futures contract?
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