Name

Reg. No.

Assignment

Derivative and Securities

Q1.
Can you give reasons to use derivatives and was there any role of these in recent financial crisis?

Explain with appropriate examples.

Q2.
An investor sells 10 futures contracts on day 1 for $ 500 each. The initial margin is 40% and the
maintenance margin is 30%. If the pattern of prices is as given in the table below, work out the
margin account of the investor for each day until the position is closed out on day 7. Suppose that:

1. The margin call restores the margin account to its maintenance proportion
2. Instead that the investor is obliged to restore the account to its initial proportion.

Day Price Gain (loss) Margin Maintenance Margin Call

Account Margin
1 500
2 480
3 490
4 530
5 580
6 520
7 490
Q3.

You went for a short sale of 2,000 shares. The price was $50 per share when you
initiate the contract. This initial margin rate is 50% and the maintenance margin
requirement of 30%. Suppose that the stock price changes is as in table 1 (price
increase) and table 2 (price decrease) below.

a. What is the Initial Margin and the Price Margin call for both cases?

b. Fill in the two tables.

Table 1: Price increase

Share Short Sale Initial Margin Total Maintenance

Shares
At time of Price Value Requirement Margin Requirement
short sale
2000 $50

Share Short Sale Additional Margin Total Maintenance Margin

Shares
Price Value Requirement Margin Requirement Call
As Stock
Price 2000 $55
Increase 2000 $60
2000 $75

Table 2: Price decrease

Share Short Sale Initial Margin Total Maintenance

Shares
At time of Price Value Requirement Margin Requirement
short sale
2000 $50

Share Short Sale Additional Margin Total Maintenance Margin

Shares
Price Value Requirement Margin Requirement Call
As Stock
Price 2000 $45
Increase 2000 $40
2000 $35