Q1.

Can you give reasons to use derivatives and was there any role of these in recent financial crisis? Explain with appropriate examples.

Q2. An investor sells 10 futures contracts on day 1 for $ 500 each. The initial margin is 40% and the maintenance margin is 30%. If the pattern of prices is as given in the table below, work out the margin account of the investor for each day until the position is closed out on day 7. Suppose that: 1. The margin call restores the margin account to its maintenance proportion 2. Instead that the investor is obliged to restore the account to its initial proportion. Day Gain (loss) Margin Maintenance Margin Call Account Margin _ _ 03. You went for a short sale of 2,000 shares. The price was $50 per share when you initiate the contract. This initial margin rate is 50% and the maintenance margin requirement of 30%. Suppose that the stock price changes is as in table 1 (price increase) and table 2 (price decrease) below. a. What is the Initial Margin and the Price Margin call for both cases? b. Fill in the two tables. Table 1: Price increase Share Short Sale initial Margin Total Maintenance At time of Price Value Requirement Margin Requirement short sale m--- Shares Share Short Sale Additional Margin Total Maintenance Margin A S k Price Value Requirement Margin Requirement Call 5 toc price EEI-_- mu-- Table 2: Price decrease II---- At time of Price Value Requirement Margin Requirement short sale M--__- Shares Share Short Sale Additional Margin Total Maintenance Margin A S k Price Value Requirement Margin Requirement Call 3 too price mm