Q1.

Can you give three reasons to use derivatives? Explain

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 Price Gain (loss) Margin Account Maintenance Margin Margin Call

1 500

2 480

3 490

4 530

5 580

6 520

7 490

Q3.

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

At time of short sale Shares Share Price Short Sale Value Initial Margin Requirement Total Maintenance Margin Requirement

2000 $50

As Stock Price Increase Shares Share Price Short Sale Value Additional Margin Requirement Total Maintenance Margin Requirement Margin Call

2000 $55

2000 $60

2000 $75

Table 2: Price decrease

At time of short sale Shares Share Price Short Sale Value Initial Margin Requirement Total Maintenance Margin Requirement

2000 $50

As Stock Price Increase Shares Share Price Short Sale Value Additional Margin Requirement Total Maintenance Margin Requirement Margin Call

2000 $45

2000 $40

2000 $35