1. You are a trader and take a short position for 1 contract in the wheat market. Recall that the contract size for wheat contracts is 5,000 bushels. The initial margin is $2,000 and the maintenance margin is $1,500. You place a market order at 10am for 1 contract and it is filled at $9482

1. At 2pm the market closes and it is announced that the settlement price is $9500.
   1. After the clearinghouse issues pays and collects, how much is in your margin account? (1)

2. Does the exchange issue a margin call, and if so for how much? (1)

2. If there was a margin call, assume you pay it. The next day (Day 2) the price drops to $9452.
   1. After the clearinghouse issues pays and collects, how much is in your margin account? (1)

2. Does the exchange issue a margin call, and if so for how much? (1)

3. If there was a margin call, assume you pay it. On Day 3 you liquidate your position. You place a market order to offset your position and it is filled at 9474.
   1. How much is in your margin account now? (1)

2. What was your net profit or loss from your futures position? (1)

2. You are an airline and have bought 1,000 call options as a hedging strategy. You have decided that you dont want to hold options anymore. How do you offset your position? Be specific. (1)

3. You are a farmer and have bought 1 put option contract for October soybeans at a strike price of 901`0. The contracts expiry month is November and the premium is 100. It is currently July, and the current market price is 905`4.
   1. Is the option in the money, at the money, or out of the money? (1)

2. What is the intrinsic value of the option at this time? (1)

3. Describe one factor that influences the difference between the current premium and the contracts intrinsic value. (2 points 1 for naming a factor, 1 for a proper description)

4. If you exercise the option now, CME Group will assign an option seller to take the other side of your position. What will be the option sellers net profit? (1)

4. You are a farmer. It is July, and as a pre-harvest marketing strategy you want to hedge with futures and sell your corn harvest on the cash market in November. The CME Group offers corn contracts for March, May, July, September, and December.
   1. If you want to ensure your crop is always hedged, which contract month do you choose for hedging? (1)

2. You decide you need to roll back your hedge. Describe the steps necessary in rolling your hedge back (you can choose any of the contract months to roll to). (2)

3. What are the costs of rolling your hedge forward? (1)

5. You are a corn farmer in northern Alabama. You have stored corn and have hedged using March corn futures. The current price for March corn futures is 3744 and you know that right now you can sell your crop on the cash market for 3726.
   1. What is the basis relative to the March corn futures? (1)

2. By late November, the futures price has increased to 3760 and the cash wheat price has increased to 3746. Has the basis strengthened or weakened? (1)

3. As a producer of wheat, are you better off or worse off due to the basis change? (1)