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Tutorial 3 Questions

This document contains 14 tutorial problems related to futures contracts, forwards contracts, short selling, and arbitrage opportunities. The problems cover distinguishing between open interest and trading volume, marking to market a short futures position, calculating forward prices, determining if a mispricing in a forward contract allows for arbitrage, and evaluating P&L on short forward positions over time.

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Hà Vân
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79 views

Tutorial 3 Questions

This document contains 14 tutorial problems related to futures contracts, forwards contracts, short selling, and arbitrage opportunities. The problems cover distinguishing between open interest and trading volume, marking to market a short futures position, calculating forward prices, determining if a mispricing in a forward contract allows for arbitrage, and evaluating P&L on short forward positions over time.

Uploaded by

Hà Vân
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Tutorial 3- Tutorial Questions

Problem 2.1.
Distinguish between the terms open interest and trading volume.

Problem 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

Problem 2.3.
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?

Problem 5.1.
Explain what happens when an investor shorts a certain share.

Problem 5.2.
What is the difference between the forward price and the value of a forward contract?

Problem 5.3.
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
12% per annum. What is the forward price?

Problem 5.4.
A stock index currently stands at 350. The risk-free interest rate is 8% per annum (with
continuous compounding) and the dividend yield on the index is 4% per annum. What should
the futures price for a four-month contract be?

Problem 5.9.
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?

Problem 5.10.
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?

Problem 5.13.
Explain why a foreign currency can be treated as an asset providing a known yield.

Problem 5.14.
The two-month interest rates in Australia and the United States are 2% and 5% per annum,
respectively, with continuous compounding. The spot exchange rate USD 0.80 per AUD.
a. What is the theoretical-no arbitrage futures price?
b. What arbitrage opportunities does this create if the futures price for a contract
deliverable in two months in the market is USD0.79?
c. What are transactions today and in two-month time that the investor should take in
order to earn this arbitrage opportunity?

Problem 5.27.
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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