QUESTION 3 (25 MARKS)

(a) Describe how a futures contract can be utilised for speculating or hedging purposes. (8 marks)

(b) A trader enters into a short forward contract on 100 million yen. The forward exchange rate is USD0.0090/JPY. Calculate the trader profit or lose if the exchange rate at the end of the contract is

(i) USD0.0084/JPY

(ii) USD0.0101/JPY

(6 marks)

(c) The CME Group offers a futures contract on long-term Treasury bonds. Characterize the investors likely to use this contract. (6 marks)

(d) The current price of gold is USD1,400 per ounce. The forward price for one-year delivery is USD1,500. An arbitrageur can borrow money at a rate of 4% per year. Make the arbitrageur strategy recommendation to your client. (5 marks)