Q1. If the initial margin on a apple futures contract is 15% and the settlement price

is 99.4 cents per lb., with a contract size of 15,000 lbs., how much must you deposit in

your account to meet the initial margin requirement? Suppose that you held a short

position open for eight days, then reversed the trade. Complete the following table,

which shows how your account would be marked to market each day as the price of

the futures contract fluctuates. Confirm that the total of the mark-to-market values

equals the ending price of the contract minus the beginning price of the contract, times

the units.

Day Futures Price Profit or Loss Daily Proceeds

0 99.4

1 101.2

2 100.3

3 99.2

4 99.6

5 98.8

6 99.2

7 98.6

8 98.1

Q2. Suppose that the maintenance margin on the apple futures contract mentioned

in the previous problem is 10%. Answer the following questions.

(a) At what dollar value of margin would you expect to receive a margin call?

(b) Will you receive a margin call if the futures price increases by $0.03 per lb.?

(c) Will you receive a margin call if the futures price increases by $0.05 per lb.?

Q3. You are evaluating the relationship between the spot price and the futures price of

palladium. The palladium currently sells for $440 per troy oz. There is a futures

contract that matures in two months with a price of $444 per troy oz. The annual risk

free rate is 3%.

(a) According to spot-futures parity, what should be the price of the futures contract?

(b) Does an arbitrage opportunity exist? If so, describe the actions that you would

take to exploit the opportunity, and determine the accompanying cash flows.

Assume that the price will turn out to be $446 per troy oz. at the expiration date

of the futures contract.

(c) If you follow your strategy from part b, what impact does the ending price of the

palladium has on your profits?

(d) Now assume that the futures price is $440. Repeat your analysis from part b.