QUESTION 3 [20 MARKS]

(a) Explain the long trading position and short trading position in a futures contract. [6 marks]

(b) Differentiate between initial margin and maintenance margin of the margin requirements in futures trading. [4 marks]

(c) Highlight the purpose of a margin call. [4 marks]

(d) Suppose a bank wishes to sell RM150 million in new deposits next month. Interest rates today on comparable deposits stand at 8 percent, but are expected to rise to 8.25 percent next month. Concerned about the possible rise in borrowing costs, the management wishes to use a futures contract.

(i) Select which type of trading position you would recommend. [2 marks]

(ii) If the bank does not cover the interest rate risk involved, compute how much in lost potential profits could the bank experience. [4 marks]