Assignment 2 Q1.

A company enters into a short futures contract to sell 5000 bushels of wheat for 250 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 Under what circumstances could $1500 be withdrawn from the margin account? Q2. A bank offers a corporate client a choice between borrowing cash at 11% per year and borrowing gold at 2% per year. Given the risk free interest rate is 9.25 per year, and storage costs are 0.5% per year. Should you borrow cash or gold? Q3. Currently, most of hedgers in crude oil futures market are buyers and most of the speculators are sellers. What should be the relationship between the futures price and expected future price? Why? Q4. According to the futures delivery procedure in CBOT, Please explain why only sellers have the right to choose to make delivery or not? Q5. Given the following information, could you find any arbitrage opportunities in Google stock? If so, what is your arbitrage procedure and profits? Bid 6-month Google futures: Google stock price: 3-month T-bill rate: 6-month T-bill rate: Dividend in 3 months later: Dividend in 6 months later: $406.10 $398.96 4.95% 5.05% $2 $3 Ask $406.50 $399.56 5.45% 5.55%

Q6. A company enters into a forward contract with a bank to sell a foreign currency for K1 at time T1. The exchange rate at T1 proves to be S1 which is greater than K1. The company asks the bank if it can roll the contract forward until time T2 rather than settle at time T1. The bank agrees to a new delivery price, K2. Explain how K2 should be calculated. (Hint: please consider the loss/gain at T1 and incorporate the loss/gain into the pricing of K2.) Q7. Suppose that the risk-free rate is 10% per annum with continuous compounding and the dividend yield on a stock index is 4$ per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitrage opportunities does this create? Q8. Suppose that F1 and F2 are two futures contracts on the same commodity with times to maturity, t1 and t2, where t2>t1. Investors argue that F2 could be greater than F1er(t2-t1). Do you agree? Why?

Q9. A forward price must be an unbiased predictor of future exchange rates. Do you agree? Why? Q10. 1) Please define spread trading? 2) Given the following information, could you find any profitable spread trading opportunities? Assume interest rates are constant.
Exp 07May 07Jul 07Sep 07Nov Last 1 Last 2 577'6 587'4 597'4 600'4 Settle 577'6 587'4 597'4 600'4 Prev Settle 574'6 584'0 595'2 594'2