Question 3 (11 marks)

a. The multiplier for a futures contract on a stock market index is $250. The maturity of the contract is four months, and the current level of the index is 4,250. The risk-free interest rate is 0.6% per month and the dividend yield on the index is 0.2% per month.

i. What is the futures price now? (2 marks)

ii. Suppose that after one month, the stock index is at 4,290. Calculate the one-month holding-period return if the initial margin on the contract is $30,000. (6 marks)

b. Louis sells ten September futures contracts on orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is $1.383 per pound. The initial margin is $3,500 per contract and the maintenance margin is $2,600 per contract. What is the futures price per pound that would lead to a margin call? (3 marks)