1) (20 points) a. When a new trade is completed what are the possible effects on the open interest? b. Can the volume of trading in a day be greater than the open interest? Explain briefly. 2) (20 points) A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery of 15000 pounds. The current futures price is 250 cents per pound, the initial margin is $10000 per contract, and the maintenance margin is $8000 per contract. What price change would lead to a margin call? Under what circumstances could $5000 be withdrawn from the margin account? 3) (20 points) The standard deviation of monthly changes in the spot price of live cattle is (in cents per pound) 1.5. The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 2. The correlation between the futures price changes and the spot price changes is 0.5 . It is now October 15 . A beef producer is committed to purchasing 500000 pounds of live cattle on November 15. The producer wants to use the December live-cattle futures contracts to hedge its risk. Each contract is for the delivery of 40000 pounds of cattle. What strategy should the beef producer follow? 4) (20 points) On July 1 , an investor holds 50000 shares of a certain stock. The market price is $50 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the September Mini S\&P 500 futures contract. The index is currently 1500 and one contract is for delivery of $50 times the index. The beta of the stock is 1.5 . What strategy should the investor follow? Under what circumstances will it be profitable? 5) (20 points) Suppose that zero interest rates with continuous compounding are as follows: Calculate forward interest rates for the second, third, fourth, and fifth years. Draw zero curve. 1) (20 points) a. When a new trade is completed what are the possible effects on the open interest? b. Can the volume of trading in a day be greater than the open interest? Explain briefly. 2) (20 points) A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery of 15000 pounds. The current futures price is 250 cents per pound, the initial margin is $10000 per contract, and the maintenance margin is $8000 per contract. What price change would lead to a margin call? Under what circumstances could $5000 be withdrawn from the margin account? 3) (20 points) The standard deviation of monthly changes in the spot price of live cattle is (in cents per pound) 1.5. The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 2. The correlation between the futures price changes and the spot price changes is 0.5 . It is now October 15 . A beef producer is committed to purchasing 500000 pounds of live cattle on November 15. The producer wants to use the December live-cattle futures contracts to hedge its risk. Each contract is for the delivery of 40000 pounds of cattle. What strategy should the beef producer follow? 4) (20 points) On July 1 , an investor holds 50000 shares of a certain stock. The market price is $50 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the September Mini S\&P 500 futures contract. The index is currently 1500 and one contract is for delivery of $50 times the index. The beta of the stock is 1.5 . What strategy should the investor follow? Under what circumstances will it be profitable? 5) (20 points) Suppose that zero interest rates with continuous compounding are as follows: Calculate forward interest rates for the second, third, fourth, and fifth years. Draw zero curve
