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Case Study On Futures

The document contains 7 case studies related to futures and options trading: 1. Explains changes to a trader's margin account when going long on soybean oil futures over 4 days. 2. Calculates profit/loss for a corn farmer selling futures contracts versus the spot price 4 months later. 3. Provides a table of corn futures prices over 10 days and asks to calculate daily P/L and ending equity for a speculator. 4. Calculates the theoretical futures price based on cash and carry, then asks how to arbitrage any difference between it and the actual futures price. 5. Sets up an arbitrage position for gold futures based on current and futures spot prices, interest rates,

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Ritesh Saria
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435 views

Case Study On Futures

The document contains 7 case studies related to futures and options trading: 1. Explains changes to a trader's margin account when going long on soybean oil futures over 4 days. 2. Calculates profit/loss for a corn farmer selling futures contracts versus the spot price 4 months later. 3. Provides a table of corn futures prices over 10 days and asks to calculate daily P/L and ending equity for a speculator. 4. Calculates the theoretical futures price based on cash and carry, then asks how to arbitrage any difference between it and the actual futures price. 5. Sets up an arbitrage position for gold futures based on current and futures spot prices, interest rates,

Uploaded by

Ritesh Saria
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Case Study on Futures 1. Soya beans Oil Futures for October is selling at 19.44 cents per lb.

The standard size of the contract is 60000 lbs. Initial argin re!uire ent is "#000 $hile the aintenance argin is "1%00. If a trader goes long in t$o October future and the prices on the subse!uent 4 days are 19& 19.4& 19.6 and 19.' cents per lb& e(plain ho$ the argin account changes. )ssu e that the oney in e(cess is $ithdra$n i ediately. *. ) corn far er sells 10 futures contracts of %000 bushels each at +s. 4.00 per bushel. The spot price is +s. #.#0 per bushel. )t the ti e of har,esting $hich is four onths fro no$& if the price per bushel reaches +s. 4.1% $hat is the basis at the ti e of e(piration of the contract- .oes the far er gain or lose and by ho$ uch a ount $ith respect to futures price and the spot price four onths ago. #. ) speculator buys t$o future contracts of /orn on day 1 and sold the on day 0. 1e again sold t$o contracts on day ' and bought the on day 10. 2ach contract consists of %000 bushels. The settle ent price of corn bushels during 10 trading days is sho$n belo$. The initial and aintenance argin are to be deposited $ith the clearinghouse are "400 and " 400 respecti,ely. The speculator has already deposited "100 $ith the bro3er. 4repare the daily gains and loss along $ith e!uity and argin account table. 5hat is the a ount of profit or loss ade by the speculator.ays Settle ent 4rice In cents 1 6ought t$o contracts **% * **' # *#0 4 **0 % **# 6 **% 0 Sold t$o contracts **9 ' Sold t$o contracts *## 9 *#6 10 6ought t$o contracts *#9 4. 7ou are pro,ided the follo$ing infor ation. /urrent price of $heat 8 "19&000 for %000 bushels +is3less rate 8 10 9 :annualized; /ost of storage 8 "*00 a year for %000 bushels One<year futures contract price 8 "*0&400 :for a contract for %000 bushels; a. 5hat is F= :the theoretical price;b. 1o$ $ould you arbitrage the difference bet$een F and F=- :Specify $hat you do no$ and at e(piration and $hat your arbitrage profits $ill be.; c. If you can sell short :/ost "100 for %000 bushels; and cannot clai any of the storage cost for yourself on short sales*& at $hat rate $ould you ha,e to be able to lend for this arbitrage to be feasible* In theory& $e a3e the unrealistic assu ption that a person $ho sells short :i.e. borro$s so ebody else>s property and sells it no$; $ill be able to collect the storage costs sa,ed by the short sales fro the other party to the transaction. %. ?i,en the follo$ing infor ation on gold futures prices& the spot prices of gold& the ris3 less interest rate and carrying cost of gold& construct an arbitrage position. )ssu e that it is )ugust *00* no$. )ugust *00# futures contract price 8 %1%.60 @ troy oz. Spot price of gold 8 4'1.60 @ troy oz. Interest rate :annualized; 8 69 /arrying cost :annualized; 8 *9 a; 5hat $ould you ha,e to do right no$ to set up the arbitrage b; 5hat $ould you ha,e to do in )ugust *00# to un$ind your position c; )ssu e no$ that you can borro$ at '9 but you can lend at only 69. 2stablish a band for the futures contract& $ithin $hich arbitrage is not feasible

6.

) treasurer of a ultinational co pany in Auly realizes that the co pany needs to raise "10 illion of co ercial paper in Bo,e ber for a period of 1'0 days. /o ercial paper of co parable !uality is currently yielding 6.%09& a cost $hich the treasurer finds acceptable. To protect itself against the possibility that interest rates ay rise before it a3es the issue& the treasurer decided to hedge the e(posure using Aanuary 2urodollar futures contract. Aanuary 2urodollar futures contract are currently trading at 94.00. 7ou are re!uired to a. State ho$ should the treasurer hedge the e(posure through 2urodollar futures contract- 1o$ any contracts are re!uired to hedgeb. If the Aanuary futures contract in Bo,e ber closes at either 9%.00 or 9#.00& calculate the cost of /4 to the co pany.

0. ) trader has gone long on % 6rent crude futures for .ece ber settle ent at "*6.#* per barrel. The ini u contract size for 6rent futures contract is 100&000 barrel. The initial argin is "%0&000 and the aintenance argin is "#0&000. The futures closes at the follo$ing prices on the ne(t ten trading daysC .ay 1 .ay * .ay # .ay 4 .ay % .ay 6 .ay 0 .ay ' .ay 9 .ay 10 " *6.19 "*6.#0 "*6.4% "*6.4' "*6.#4 "*6.*1 "*%.9' "*%.'0 "*%.90 "*%.9%

The trader $ill ta3e out the profit out of the argin account $hene,er he gets the opportunity to do so. 7ou are re!uired to a. 4repare the argin account sho$ing all the cash flo$s. b. Find the profit@loss for the trader after 10 trading days '. On Darch 01& *00*& DB/ Inc. a ES co pany e(pecting to generate in Aune a surplus of "% illion for # onths. The co pany has decided to in,est the funds for #< onths in T<bills. The present econo ic scenario suggests that Federal 6an3 ay cut interest rates further& so the yield ay decline after # onths. So it decided to hedge the fall in interest rate through #< onth T F bill futures. The Aune T F bill futures are !uoting currently at 96.*%. Standard size of T F bill futures is "1 illion and the tic3 size is "*%. 7ou are re!uired to a. 2(plain& ho$ the co pany can hedge through T F bill futures. b. /alculate the annualized discount yield. If in Aune # onth T F bills are !uoted at 96.%0 and 9%.0%

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