NB: Do NOT wait until the last date provided before you complete the assignment on

myUnisa, as the system might be very busy or down for routine maintenance.

Required:

This assignment consists of three questions of 25 marks each. You will be required to complete

all three questions and submit your document in PDF form on myUnisa. Although you have to

complete all three questions only one of the questions will be marked. Marks will be deducted

if all three questions are not completed.

Question 1 (25 marks)

1.1 You enter into a futures contract to buy white maize for R1 845 per tonne. The contract

is for delivery of 1 000 tonnes. The initial margin is R 200 000 and the maintenance margin

is R60 000. You receive a margin call as R140 000 was lost from the margin account.

What change in the futures price led to this margin call and what will happen if you do not

meet the margin call? (5)

1.2 The current price of a stock is $105, and three-month European call options with a strike

price of $107 currently sell for $5.20. An investor who feels that the price of the stock will

increase is trying to decide between buying 100 shares and buying 1,500 call options.

Both strategies involve an investment of $10,500. What advice would you give if the stock

price increased to $120? How high does the stock price have to rise for the option strategy

to be more profitable? (5)

1.3 An analyst for Bloom Ltd, gathered the following information with regards to futures

contract:

Current spot-market price of R60

Risk-free interest rate of 8.87% per annum

The six-month future contract is priced at R62.60

Given that the actual futures price of the contract is R59, describe the strategy an

arbitrageur could follow. (5)