P1. The futures price of corn is $2.00. The contracts are for 10,000 bushels, so a contract is worth $20,000. The margin requirement is $2,000 a contract, and the maintenance margin requirement is $1,200. A speculator expects the price of the corn to fall and enters into a contract to sell corn.
a. How much must the speculator initially remit?
b. If the futures price rises to $2.13, what must the spectator do?
c. If the futures price continues to rise to $2.14, how much does the speculator have in the account?
P2. The futures price of gold is $1,050. Futures contracts are for 100 ounces of gold, and the margin requirement is $5,000 a contract. The maintenance margin requirement is $1,500. You expect the price of gold to rise and enter into a contract to buy gold.
a. How much must you initially remit?
b. If the futures price of gold rises to $1,055, what is the profit and percentage return on your investment?
c. If the futures price of gold declines to $1,048 what is the loss and percentage return on the position?
d. If the futures price falls to $1,038, what must you do?
e. If the futures price continues to decline to $1,101, how much do you have in your account?
f. How do you close your position?
P3. The futures price of British pounds is $2.00. Futures contracts are for 10,000, so a contract is worth $20,000. The margin requirement is $2,000 a contract and the maintenance market requirement is $1,200. A speculator expects the price of the pound to fall and enters into a contract to sell pounds.
a. How much must the speculator initially remit?
b. If the futures price rises to $2.13, what must the speculator do?
c. If the futures price continues to rise to $2.14, how much does the speculator have in the account?
6. You expect the stock market to decline, but instead of selling stocks short, you decide to sell a stock index futures contract based on an index of New York Stock Exchange common stocks. The index is currently 600 and the contract has a value that is $250 times the amount of the index. The margin requirement is $2,000 and the maintenance margin requirement is $1,000.
a. When you sell the contract, how much must you put up?
b. What is the value of the contract based on the index?
c. If after one week of trading the index stands at 601, what has happened to your position? How much have you lost or profited?
d. If the index rose to 607, what would you be required to do?
e. If the index declined to 595 (1 percent from the starting value), what is your percentage profit or loss on your position?
f. If you had purchased the contract instead of selling it, how much would you have invested?
g. If you had purchased the contract and the index subsequently rose from 600 to 607, what would be your required investment?
h. Contract your answers to parts (d) and (g).
7. One use for futures markets is "price discovery," that is, the futures price mirrors the current consensus of the future price of the commodity. The current price of gold is $950 but you expect the price to rise to $1,000. If the futures price were $990, what would you do? If your expectation is fulfilled, what is your profit? If the futures price were $1,018, what would you do? What futures price will cause you to take no action? Why?
