Please kindly provide an step by step solution, and answer all questions.

1. A company enters into a long futures contract to buy 5,000 bushels of wheat for 480 cents per bushel. The initial margin is $1,200 and the maintenance margin is $900.

• What futures price would lead to a margin call?
• Under what circumstances could the margin account increase in value by $600? In other words, what futures price would make the margin account to increase in value by $600?

2. One orange juice futures contract is on 15,000 pounds of frozen concentrate. Suppose that in September 2009 a company sells a March 2011 orange juice futures contract for 120 cents per pound. In December 2009 the futures price is 140 cents. In December 2010 the futures price is 110 cents. In February 2011 the futures price is 125 cents. The company has a December year end.

What is the company's profit or loss on the contract?

What is the accounting treatment of the transaction if the company is classified as a) a hedger and b) a speculator?

3. Assume for simplicity that there are no storage costs in this problem. Also, assume continuous compounding.

Consider the following forward prices on an investment asset

Forward prices (cents/unit of the asset) as of February

Mar 270.25

May 275.25

• Use the above information on March and May forward prices to determine the spot price of the asset and risk-free rate in February at which there should be no profitable arbitrage opportunities.

Hint: There is a theoretical model for the price of a forward contract. We have data on two different forward contracts. Use the model for these two contracts to solve for the spot price and the risk-free rate.

• Now let us assume that the observed risk-free rate is different from your answer to the above question (i.e. either higher or lower than the risk-free rate you obtained above). Can you clearly outline a trading strategy in February to exploit any arbitrage opportunities?