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Question 2 (20 marks)

Use the following information for parts A to B.

Miss Ho bought one HSBC futures contract (400 shares per contract) at the futures price of $52 per share. The initial margin for the contract is $1,600 and the maintenance margin is $1,000. Risk-free rate is 2%. Inflation rate is 1%.

A. At what HSBC futures price will Miss Hos margin value fall to the level of the maintenance margin? (4 marks)

Question 2 (20 marks) Use the following information for parts A to B. Miss Ho bought one HSBC futures contract (400 shares per contract) at the futures price of $52 per share. The initial margin for the contract is $1,600 and the maintenance margin is $1,000. Risk-free rate is 2%. Inflation rate is 1%. A. At what HSBC futures price will Miss Ho's margin value fall to the level of the maintenance margin? (4 marks) B. Suppose the market price of HSBC stock is $55 per share on the maturity date. Calculate Miss Ho's profit /loss on the futures contract. (3 marks) Page 11 of 19 Use the following information for parts C to D. C. The spot price of gold is USD1,200 per ounce. Risk-free rate is 2% p.a. According to the spot-futures parity, what is the 6-month futures price for gold? (3 marks) D. Further to part C, suppose the 6-month futures contract of gold is trading at $1,250 in the market. Should an investor long or short gold futures contract to make arbitrage profit? (3 marks) i. Explain. ii. Calculate the arbitrage profit the investor can make on one ounce of gold. (7 marks) Page 13 of 19