1. A farmer shorts cocoa futures for 100 metric tons at $200 per metric ton. The exchange requires a 20% initial margin. Meanwhile, the maintenance margin is 70% of the initial margin. What price change per metric ton would lead to a margin call?
2. You currently hold a portfolio of Malaysian stocks worth RM2,187,500. You anticipate that in the coming 3 months there will be volatility in equity markets. As such, you would like to completely hedge your portfolio of stocks. Use the following information to answer the questions. Beta of your portfolio = 1.2 Spot index value (FBM KLCI) = 1,750 Risk-free rate = 4% per annum 3-month SIF contract = 1,767.24 points Expected dividend yield = 0%

i. How many SIF contracts should you use to fully hedge your portfolio?

ii. Outline the hedge strategy and show the resulting portfolio value assuming that the market falls by 10% by futures maturity.

iii. If you felt that equity markets were going to fall, why not just liquidate your portfolio (sell all your stocks) and buy them back after the downward trend, instead of hedging your portfolio using derivatives? [Hint: What are the specific advantages of using futures contracts here?

3. In todays derivative markets, it is common for most derivative transactions to end with cash settlement instead of physical delivery. Briefly explain why cash settlement is typically preferred over physical deliver.