Question
Part II Constructed Response Questions Question 1: You take a long position in one WTI crude oil contract for future delivery at $62.23 per barrel.
Part II Constructed Response Questions
Question 1:
You take a long position in one WTI crude oil contract for future delivery at $62.23 per barrel. The contract size is 1,000 barrels. The initial margin is $5,000 and the maintenance margin is $2,500.
- In what direction does the futures price has to move so your position loses money?
- What is the futures price per barrel below or above which you will receive a margin call?
- Above $64.73
- Above $62.93
- Below $59.73
- None of the above
Question 2:
An investor wants to minimize market risk on a $50 million stock portfolio by using futures for hedging. The portfolios beta with respect to the S&P 500 equity index is 1.25. The current index futures quote is 2,875 and each contract is for delivery of $250 times the index.
- What futures position should the investor open to execute the hedge? Long or short?
- How many index futures contracts does the investor need to use to minimize market risk?
- To reduce portfolio beta to 0.625, how many contracts does the investor need use?
Question 3:
The Russell 2000 equity index is currently quoted at 1,565. The risk-free interest rate is 2.50% per year, with continuous compounding, and the dividend yield on the index is 1.50% per year.
- What should the futures price for a six-month contract be?
- If the six-month Russell 2000 futures contract is currently quoted at 1,600, what futures position should be part of an arbitrage strategy that guarantees a profit? Long or short?
Question 4:
The price of a non-dividend paying stock is now $52, and its annual volatility is 30%. The risk-free interest rate is 4% per annum with continuous compounding.
- Calculate the BSM value of a three-month European call option with a strike price of $50
- Calculate the BSM value of a three-month European put option with a strike price of $50
- Verify that put-call parity holds for the call and the put option
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