3. A silver futures contract requires the seller to deliver 5,000 Troy ounces of silver. Jerry Harris sells one July silver futures contract at a price of $8 per ounce, posting a $2,025 initial margin. If the required maintenance margin is $1,500, what is the first price per ounce at which Harris would receive a maintenance margin call?
4. a. Using Figure 16.2, compute the dollar value of the stocks traded on one contract on the Standard & Poor's 500 index. The closing spot price of the S&P index is given in the last line of the figure. If the margin requirement is 10% of the futures price times the multiplier of $250, how much must you deposit with your broker to trade the March contract?
b. If the March futures price were to increase to $1,200, what rate of return would you earn on your net investment if you entered the long side of the contract at the price shown in the figure?
c. If the March futures price falls by 1%, what is the percentage gain or loss on your net investment?
Why is there no futures market in cement?
Why might individuals purchase futures contracts rather than the underlying asset? 7. What is the difference in cash flow between short-selling an asset and entering a short futures position?
Consider a stock that will pay a dividend of D dollars in one year, which is when a futures contract matures. Consider the following strategy: Buy the stock, short a futures contract on the stock, and borrow S0 dollars, where S0 is the current price of the stock.
a. What are the cash flows now and in one year? (Remember the dividend the stock will pay.)
Show that the equilibrium futures price must be F0 = S0(1 + r) - D to avoid arbitrage.
Call the dividend yield d = D/S0, and conclude that F0 = S0(1 + r - d). A hypothetical futures contract on a nondividend-paying stock with current price $150 has a maturity of one year. If the T-bill rate is 6%, what should the futures price be?
What should the futures price be if the maturity of the contract is three years? What if the interest rate is 8% and the maturity of the contract is three years? Your analysis leads you to believe the stock market is about to rise substantially. The market is unaware of this situation. What should you do? In each of the following cases, discuss how you, as a portfolio manager, could use financial futures to protect a portfolio.
a. You own a large position in a relatively illiquid bond that you want to sell.
b. You have a large gain on one of your long Treasuries and want to sell it, but you would like to defer the gain until the next accounting period, which begins in four weeks.
c. You will receive a large contribution next month that you hope to invest in long-term corporate bonds on a yield basis as favorable as is now available.
Suppose the value of the S&P 500 stock index is currently $1,300. If the one-year T-bill rate is 5% and the expected dividend yield on the S&P 500 is 2%, what should the one-year maturity futures price be? 13. It is now January. The current interest rate is 5%. The June futures price for gold is $346.30, while the December futures price is $360.00. Is there an arbitrage opportunity here? If so, how would you exploit it?
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