Question 3 (20 marks)

You expect that there will be geopolitical tension between Russia and Ukraine within coming 3 months. You think that the gold price will jump if it happens.

(a) Suppose that the gold currently sells for $1,800 per ounce. If the risk-free interest rate is 0.25% per month, what will be the three-month maturity futures contract price? (3 marks)

(b) A gold futures contract calls for delivery of 100 Troy ounces of gold. The initial margin requirement is 5%. Assume the futures contract is fairly priced, how much initial margin you need to deposit if you long 10 contracts? (3 marks)

(c) After 1 month, there is war between the 2 countries and gold soars to $1,900 per ounce. Calculate the one-month holding period return if the futures contracts keep priced fairly. (9 marks)

(d) If the required maintenance margin is $35,000, what is the futures price per ounce that you will receive a maintenance margin call? (5 marks)