Question
Consider a futures contract written on one unit of company TTKs stock maturing in 9 months. Theinterestrateis4%perannumcompoundedquarterly.Forsimplicity,assumesthat the dividend rate is zero. The current price
Consider a futures contract written on one unit of company TTKs stock maturing in 9 months. Theinterestrateis4%perannumcompoundedquarterly.Forsimplicity,assumesthat the dividend rate is zero. The current price of company TTKs stock is $15. Assume that you can short-sell the underlying stock.
(a) What is the futures price of a 9-month futures contract on one unit of company TTKs stock if you initialise one today? (2 mark)
(b) Suppose that the futures price of the contract specified in part (a) for company TTKs stock is currently trading at $20. You hold 1000 units of these futures contracts. Margins are required for holding these futures contracts: initial margin is at 30% of the market value and the maintenance margin is at 30% of the market value. For simplicity, assume that mark-to-market is done at the end of each quarter and futures prices at the end of the next 3 quarters are 18, 15 and 19. Assume that interest is paid on margin account balances quarterly at a rate of 4% per annum. Compute the balance in the margin account at the end of each quarter; indicate whether a margin call will be made and for which amount. (4 marks)
(c) During the GFC, someone made the suggestion to suspend mark-to-market on margin accounts. Do you agree or not agree with his suggestion. Critically assess his suggestion. Identify at least one pro and one con of suspending mark-to-market during the financial crisis. (4 marks)
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