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EXERCISE & PROBLEM CHAPTER 6

1. A company enters into a short futures contract to sell 5,000 bushels of wheat for 250cent per bushel. The initial
margin is $3,000 and the maintenance margin is $2,000. What price change would lead to a margin call? Under
what circumstances could $1,500 be withdraw from the margin account?
2. You enter into a futures contract to buy €125,000 at $1.28 per euro. The spot exchange rate when you enter the
contract is $1.16. Your initial performance bond is $6,800 and your maintenance level is $2,700. At what settle
price will you get a margin call?
3. An investor enter into a short cotton futures contract when the futures price is 50 cents per pound. One contract
is for the delivery of 50,000 pounds. How much does the investor gain or lose if the cotton price at the end of the
contract is (a) 48.20 cents per pound and (b) 51.30 cents per pound?
4. A pig farmer expects to have 90,000 pounds of live hogs to sell in three months. The live-hogs futures contract on
the CME is for the delivery of 30,000 pounds of hog. How can the farmer use the contract for hedging? From the
farmer’s viewpoint, what are the pros and cons of hedging?
5. The forward price on DM for delivery in 45 days is quoted as 1.8204. The futures price for a contract that will be
delivered in 45 days is 0.4579. Explain these two quotes. Which is more favorable for an investor wanting to sells
marks?
6. Suppose that on October 24, 2015 you take a short in an April 2016 live-cattle futures contract. You close out your
position on January 21,1998. The futures price (per pound) is 61.20 cents when you enter into the contract, 58,30
cents when you close out your position, and 58.80 cents at the end of December 2016. One contract is for the
delivery of 40,000 pounds of cattle. What is your total profit?
7. On Monday morning, an investor takes a long position in a pound futures contract that matures on Wednesday
afternoon. The agreed-on price is $1.78 for BP62,500. At the close of trading on Monday, the futures price has
risen to $1.79. At Tuesday close, the futures price rises further to $1.80. At Wednesday close, the futures price
falls to $1.785, and the contract matures. The investor trade off the contract, detail the daily settlement process.
What will be the investor’s profit (loss)?
8. Citicorp sells a call option on Mexico peso (Contract size ps500,000) at a premium of $0.04 per peso. If the
exercise price is $0.71 and the spot price of peso at date of expiration is $0.73. What is Citicorp’s profit (loss) on
the call option?
9. A trader executes a “bear spread” on the Japanese yen consisting of a long PHLX 103 March put and a short PHLX
101 march put.
a. If the price of the 103 put is 2.81cent/yen and the price of the 101 put is 0.64 cent/yen. What is the net
cost of the bear spread?
b. What is the maximum amount the trader can make on the bear spread in the event the yen depreciates
against the dollar?
c. Redo your answer to parts a and b, assuming the trader executes a bull spread consisting of a long PHLX
101 march call prices at 1.96 cent/yen and a short PHLX 99 March call priced at 3.91 cent/yen. What is the
trader’s maximum profit? Maximum loss?
10. Three put options on a stock have the same expiration date and strike prices of 55$, 60$, and $65. The market
price are $3, $5, and $8, respectively. Explain how a butterfly spread can be created. Construct a table showing the
profit from the strategy. For what range of stock prices would the butterfly spread lead to a loss?