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FN 450 Unit 2 Assignment Derivatives

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Question;1. Indicate whether a forward or a futures contract would be more appropriate in each of the following scenarios. You can just type ?forward? or ?futures? after each description.a. You want to be sure there is no credit risk from the counterparty failing to pay.b. You will have a non-standard amount of a commodity to sell.c. You will be taking a long position, and you want delivery to take place on one specific date.d. You want your account to be settled on a daily basis.e. You will have a commodity to sell, but you have no particular person in mind to sell it to.2. Sally and Larry have entered 10 futures contracts for November wheat at $9 per bushel, with Sally short and Larry long. (In other words, Sally sold the contract and Larry bought it). One contract is for 5,000 bushels of wheat.a. If these contracts remain open until delivery, who makes the delivery and how much wheat is delivered? Who makes the payment and how much is paid?b. If this is a typical futures contract traded through an exchange, is it likely that these contracts will actually remain open through delivery? Explain.3. The widget exchange has just opened for the first time, and the following trades take place on the first day. One contract is for one widget to be delivered in March.? 10 contracts traded with Alan long and Ben short.? 20 contracts traded with Alan long and Chris short.? 10 contracts traded with Ben long and Chris short.a. Find the net position of each person at the end of the day, using the terms ?long? and ?short? as appropriate.Alan:Ben:Chris:b. Find the day?s trading volume.c. Find the open interest.4. Suppose that you enter into a long futures contract to buy December cattle for $1.24 per pound. The size of the contract is 10,000 pounds. Initial margin is $5,000 and maintenance margin is $4,000. Answer these questions and show work.a. At the end of the first day, the settlement price is $1.25 per pound. What is your daily gain, and what is the balance in your margin account?b. At the end of the second day, the settlement price is $1.22 per pound. What is your daily loss, and what is the balance in your margin account.c. What settlement price would lead to a margin call?5. A trader enters three short futures contracts, with each contract for 100 ounces of gold for $1,471.20 per ounce. Initial margin is $3,000 per contract and maintenance margin is $2,400 per contract. Answer these questions and show work.a. What total amount does the trader have in the margin account at the beginning of this transaction?b. At the end of the first day, the settlement price is $1472.70. What is the balance in the margin account? Show work.6. One orange juice futures contract is on 15,000 pounds of frozen concentrate. Suppose that in September 2013 a company sells a contract for 120 cents per pound. In December 2013, the futures price is 115 cents per pound. The company closes its position in February 2014 when the futures price is 105 cents per pound. Answer these questions and show work.a. What is the company?s profit on the contract?b. If this contract is a not a hedge, then for accounting purposes, what profit is realized in 2013 and what profit is realized in 2014?

 

Paper#48554 | Written in 18-Jul-2015

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