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    Workshop 3: Additional Question Ch2 - 1

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    Workshop 3: Additional Question Ch2 - 1

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    WS 3 Q

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    Workshop 3: Additional Question Ch2 - 1

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    Workshop 3

    Additional Question Ch2 - 1

    Distinguish between the terms open interest and trading volume.

    Additional question Ch 2 - 2

    An investor takes a short position in two 3-month futures contracts on a stock. The contract
    size is 100 shares, and the futures price is US$110 per share. The initial margin requirement
    is US$500/contract. The maintenance margin is US$250/contract. These contracts are
    closed out after 10 days at the price of $102 per share. Given the information in the
    following table, please do the marking to market process for this investor?

    Trade Price Settle Price


    Day ($) ($)
    1 110
    1 111
    2 112
    3 113
    4 115
    5 110
    6 109
    7 107
    8 105
    9 100
    10 102

    Book Question 2.1.

    Suppose that you enter into a short futures contract to sell July silver for $17.20 per ounce.
    The size of the contract is 5,000 ounces. The initial margin is $4,000, and the maintenance
    margin is $3,000. What change in the futures price will lead to a margin call? What happens
    if you do not meet the margin call?

    Chapter 5

    Book Question 5.1.


    What is the difference between the forward price and the value of a forward contract?

    Book Question 5.2.


    Suppose that you enter into a six-month forward contract on a non-dividend-paying stock
    when the stock price is $30 and the risk-free interest rate (with continuous compounding) is
    5% per annum. What is the forward price?
    Book Question 5.3.
    A stock index currently stands at 350. The risk-free interest rate is 4% per annum (with
    continuous compounding) and the dividend yield on the index is 3% per annum. What should
    the futures price for a four-month contract be?

    Book Question 5.5


    Explain why a foreign currency can be treated as an asset providing a known yield.

    Book Question 5.12


    The two months interest rates in Switzerland and the US are 1% and 2% respectively per
    annum with continuous compounding. The spot prices of the Swiss Franc is $1.05. The future
    price for a contact deliverable in 2 months is 1.05. What arbitrage opportunities does this
    create?

    Book Question 5.13


    The spot price of silver is $25 per ounce. The storage costs are $0.24 per ounce per year
    payable quarterly in advance. Assuming that the interest rates are 5% per annum for all
    maturities. Calculate the future price of silver for delivery in 9 months.

    Additional Problem Ch 5 - 1
    An investor considers a one-year forward contract on a non-dividend-paying stock when the
    stock price is $40 and the risk-free rate of interest is 10% per annum with continuous
    compounding.

    a) What are the forward price and the initial value of the forward contract?
    b) Suppose that the investor enters into a long position in (buys) this forward contract, six
    months later, the price of the stock is $45 and the risk-free interest rate is still 10%.
    What are the forward price and the value of the forward contract? Does the investor
    gain or lose?
    c) Suppose that the investor enters into a short position in (sells) this forward contract, six
    months later, the price of the stock is $43 and the risk-free interest rate is still 10%.
    What are the forward price and the value of the forward contract? Does the investor
    gain or lose?

    Additional Problem Ch 5 - 2
    An investor considers a one-year forward contract on a non-dividend-paying stock when the
    stock price is $50 and the risk-free rate of interest is 10% per annum with continuous
    compounding.

    a. What are the forward price and the initial value of the forward contract?
    b. If the market price of this forward contract is currently quoted at $60, what
    transactions should the investor take today and in one year time in order to exploit
    this mispricing situation?
    c. If the market price of this forward contract is currently quoted at $48, what
    transactions should the investor take today and in one year time in order to exploit
    this mispricing situation?
    Additional problem Ch 5 – 3

    A stock is expected to pay a dividend of $1 per share in two months and in five months. The
    stock price is $50, and the risk-free rate of interest is 8% per annum with continuous
    compounding for all maturities. An investor has just taken a short position in a six-month
    forward contract on the stock.
    a) What are the forward price and the initial value of the forward contract?
    b) Three months later, the price of the stock is $48 and the risk-free rate of interest is still
    8% per annum. What are the forward price and the value of the short position in the
    forward contract?

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