Question
1. You are completely convinced that the price of copper is going to rise significantly over the next year and want to take as large
1. You are completely convinced that the price of copper is going to rise significantly over the
next year and want to take as large a position as you can in the market but have limited funds.
How could you use the futures market to leverage your position?
2. Suppose you expect the price of copper to rise, you have $8,000 to invest, and would like to
leverage your exposure to the copper market. The strike price for copper is at $3 a pound and the
margin requirement for a futures contract for 25,000 pounds of copper is $8,000.
a. Calculate your return if copper prices rise to $3.10 a pound.
b. How does this compare with the return you would have made if you have simply
purchased $8000 worth of copper and sold it a year later?
c. Compare the risk involved in each of these strategies.
3. Suppose you were the manager of a bank that raised most of its funds from short-term
variable-rate deposits and used these funds to make fixed-rate mortgage loans.
a. Should you be more concerned about rises or falls in short-term interest rates?
b. How could you use interest-rate swaps to hedge against the interest-rate risk you face?
EXIT
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