Moose Hairies Essay Example
Solutions Ch 2
2.26 One orange juice futures contract is on 15,000 pounds of frozen concentrate that in September 2009 a company sells a March 2011 orange juice futures contract 120 cents per pound. In December 2009, the futures price is 140 cents; in December 2010 it is 110 cents and in February 2011 it is closed out at 125 cents. The company has a December year end. What is the company’s profit or loss on the contract?
F=140 P&L = -20*15000
F=110 P&L=+30*15000
F=125 P&L=-15*15000
Total P&L =-5*15000=75,000
2.27 A company enters into a short futures contract to sell 5000 bushels of wheat for 450 cents per bushel. The initial margin is $3000 and the maintenance margin is $2000. What price change would lead to a margin call? Under what circumstances could $1500 be withdrawn from the margin account?
A drop in the margin account of more than $1000 will cause a margin call. The margin account will drop if the price increases (since this is a short position) by more than $1000/5000=$0.20 or 20 cents.
1500 could be withdrawn if the price drops by $1500/5000=$0.30 or 30 cents.
2.28 Suppose that there are no storage costs for crude oil and the interest rate for both borrowing and lending is 5% per annum. How could you make money on January 8, 2007 by trading June 2007 and December 2007 contracts on Crude oil? Settle June 2007 Settle December 2007
January 8 60.01-0.1=59.91 62.94-0.28=62.66
January 9 60.01 62.94
Right now: Long June contract & Short September Contract
In June: receive oil, borrow 59.91 at 5%, pay 59.91, store the oil
In September: deliver oil and receive 62.66, return loan of 59.91*e^(5%*(6/12))=61.42.
2.25 Explain what is meant by open interest. Why does the open interest usually decline in the month preceding the deliver month? On a particular day, there are 2000 particular futures contracts. Of the 2000 traders on the long side of the market, 1400 closing out position and 600 were
2.26 One orange juice futures contract is on 15,000 pounds of frozen concentrate that in September 2009 a company sells a March 2011 orange juice futures contract 120 cents per pound. In December 2009, the futures price is 140 cents; in December 2010 it is 110 cents and in February 2011 it is closed out at 125 cents. The company has a December year end. What is the company’s profit or loss on the contract?
F=140 P&L = -20*15000
F=110 P&L=+30*15000
F=125 P&L=-15*15000
Total P&L =-5*15000=75,000
2.27 A company enters into a short futures contract to sell 5000 bushels of wheat for 450 cents per bushel. The initial margin is $3000 and the maintenance margin is $2000. What price change would lead to a margin call? Under what circumstances could $1500 be withdrawn from the margin account?
A drop in the margin account of more than $1000 will cause a margin call. The margin account will drop if the price increases (since this is a short position) by more than $1000/5000=$0.20 or 20 cents.
1500 could be withdrawn if the price drops by $1500/5000=$0.30 or 30 cents.
2.28 Suppose that there are no storage costs for crude oil and the interest rate for both borrowing and lending is 5% per annum. How could you make money on January 8, 2007 by trading June 2007 and December 2007 contracts on Crude oil? Settle June 2007 Settle December 2007
January 8 60.01-0.1=59.91 62.94-0.28=62.66
January 9 60.01 62.94
Right now: Long June contract & Short September Contract
In June: receive oil, borrow 59.91 at 5%, pay 59.91, store the oil
In September: deliver oil and receive 62.66, return loan of 59.91*e^(5%*(6/12))=61.42.
2.25 Explain what is meant by open interest. Why does the open interest usually decline in the month preceding the deliver month? On a particular day, there are 2000 particular futures contracts. Of the 2000 traders on the long side of the market, 1400 closing out position and 600 were