Assignment Q1. A futures market transaction has the feature of "marking to market". Explain this concept to a novice, clearly bringing out the concept of settlement price and daily price limit, margin and maintenance margin. You have to use an example to illustrate these concepts. What is the primary purpose of requiring marking-to-market. Q2. Suppose you own a portfolio of British securities valued at $430,000. The forward exchange rate is currently at $1 = 0.67. A currency contract on British pounds is set at 62,500 pounds. How many contracts must you trade to protect your portfolio from exchange rate risk? The initial margin on the contract is 10%. What is the return on investment if on closing the exchange rate was $1 = 0.71. (Hint: First you need to decide whether to go long or short.) Q3. Calculate the return on invested capital on a platinum futures contract for 50 troy ounces when the purchase price is $810.40 per ounce and the sale price is $823.54 per ounce. The initial margin is $2,500. Q4. PepsiCo (owners of Minute Maid and Frito Lays brands) enters into a 200 futures contract on FOCJ-A to hedge its input costs when the spot price of $1.53 per pound and a January delivery futures price of $1.66 per pound. Calculate the ROIC for PepsiCo when they close the contract in late December and the spot and January futures price is $1.56 and $1.68 respectively. Initial margin is 5%. Q5. Freeport McMorran is one of the largest producers of copper in the world. It entered into a futures contract for 100,000 pounds when spot was USD2.09 per pound and futures price of USD2.17 per pound for August delivery to hedge their exposure to copper prices. Calculate their ROIC in July when the contract was offset. On the offset date, copper traded at USD2.19 in the spot and $2.26 for August delivery in the futures market. Initial margin requirement is 5%. Q6. Describe the difference between a forward and a futures contract. Discuss one advantage of using each of the contracts. Q7. Using examples, explain the following terms: a. Cash settlement b. Triple witching C. Basis risk d. Counterparty risk. Assignment Q1. A futures market transaction has the feature of "marking to market". Explain this concept to a novice, clearly bringing out the concept of settlement price and daily price limit, margin and maintenance margin. You have to use an example to illustrate these concepts. What is the primary purpose of requiring marking-to-market. Q2. Suppose you own a portfolio of British securities valued at $430,000. The forward exchange rate is currently at $1 = 0.67. A currency contract on British pounds is set at 62,500 pounds. How many contracts must you trade to protect your portfolio from exchange rate risk? The initial margin on the contract is 10%. What is the return on investment if on closing the exchange rate was $1 = 0.71. (Hint: First you need to decide whether to go long or short.) Q3. Calculate the return on invested capital on a platinum futures contract for 50 troy ounces when the purchase price is $810.40 per ounce and the sale price is $823.54 per ounce. The initial margin is $2,500. Q4. PepsiCo (owners of Minute Maid and Frito Lays brands) enters into a 200 futures contract on FOCJ-A to hedge its input costs when the spot price of $1.53 per pound and a January delivery futures price of $1.66 per pound. Calculate the ROIC for PepsiCo when they close the contract in late December and the spot and January futures price is $1.56 and $1.68 respectively. Initial margin is 5%. Q5. Freeport McMorran is one of the largest producers of copper in the world. It entered into a futures contract for 100,000 pounds when spot was USD2.09 per pound and futures price of USD2.17 per pound for August delivery to hedge their exposure to copper prices. Calculate their ROIC in July when the contract was offset. On the offset date, copper traded at USD2.19 in the spot and $2.26 for August delivery in the futures market. Initial margin requirement is 5%. Q6. Describe the difference between a forward and a futures contract. Discuss one advantage of using each of the contracts. Q7. Using examples, explain the following terms: a. Cash settlement b. Triple witching C. Basis risk d. Counterparty risk
