The S&P futures contract trades at $250 times the S&P level in index points (currently 4,000 therefore contract has notional $1M value). The initial margin is $66,000 per contract and maintenance margin $60,000 per contract. The next contract is delivered in exactly a quarter of a year from now and you expect the equity market risk premium to be about 8% p.a. (or about 2% part year for the quarter).

REQUIRED

1.Using up to five lines, describe in your own words by what % the S&P will have to drop in price level before you are required to take action AND the region in which the futures Exchange/Clearing House can take action if you do not act.

2.If you were to treat the initial margin as your entire investment, say in five lines what return you might expect on the dollar value of the margin account required to support 1 contract ($250 times the S&P level) until the end of the quarter.

3.Assume you have no intention of maintaining the position on 1 contract with any further margin after the initial margin, and are prepared to sacrifice all the initial margin on the contract. Whilst not a standard put or call, say in five lines how this strategy relates to that of traded options using thresholds to indicate action.