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Problem 3. (a) (5 points) A company enters into a short futures contract at timet 0 to sell 5,000 bushels of wheat for $2.5 dollars
Problem 3. (a) (5 points) A company enters into a short futures contract at timet 0 to sell 5,000 bushels of wheat for $2.5 dollars per bushel after two years (ie, T-2). Assume the sequence of future dates is t1-0, t2 = 1 and t3 = T = 2, The initial margin is $3,000 and the maintenance margin is $2,000. What price change between times ti and t2 would lead to a margin call at time t2? What price change between times t and t2 will allow the company to withdraw $1,500 from the margin account (without closing the futures position) at time t2? b) (5 points) The current price of silver is $17 per ounce. The storage costs are $0.24 per ounce per year payable every six months in advance (e.g. you have to pay immediately storage costs of $0.24/2-$0.12 per ounce for the first half year). Assuming that the continuously compounded interest rate is 10% per year, calculate the futures price of silver for delivery in nineteen months (Hint: Regard storage costs as negative dividends)
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