Question 1

You purchase eight contracts on 150 troy ounces at price of $412 per ounce. The initial margin is $1,500 per contract, and the maintenance margin is $1,200 per contract. The closing price the next day is $417 per ounce. What is your new margin balance?

Accepted Answer

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Question 2

The spot price on cocoa is $1,480 a ton. The futures price is $1,478. The basis is ________ and the market is a(n) ________ market.

Accepted Answer

Basis = Futures price - Spot price
Basis = $1,478 - $1,480
Basis = -$2
Since the basis is negative, it indicates an inverted market. Therefore, the correct choice is D) 2; inverted.

Question 3

The spot price on orange juice is $132.50 for 15,000 pounds. The futures price is $133.10. The basis is ________ and the market is a(n) ________ market.

Accepted Answer

The basis is calculated as the spot price minus the futures price, which is $132.50 - $133.10 = -0.6. A negative basis indicates a carrying-charge market, where the futures price is higher than the spot price due to storage costs, interest, and other carrying charges.

Question 4

What are the differences between a futures contract and a forward contract?
 Would you ever want to use a forward contract rather than a futures contract?

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Question 5

You sell 10 futures contracts where each future represents 22,000 gallons. The initial margin is $3,000, and the maintenance margin is $2,100. At what price change will you receive a margin call?

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Question 6

You want to hedge a stock portfolio with a value of $325 million using a S&P 500 index futures contract that is currently quoted at 1,286.50. The multiplier of the contract is $250. If the beta of the portfolio is 1.15, how many futures contract are needed?

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Question 7

Assume that you own an inventory of a commodity. Explain how and why you would hedge this inventory.

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Question 8

In all futures contracts, even commodity futures, only 1% to 3% of futures contracts are delivered. That is, at expiration, the party that originally purchased a futures contract has sold a futures contract to offset their position. Since most market participants do not deliver or receive delivery of the contract, does this mean that most futures markets participants are speculators?

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Question 9

A client has asked you about hedging his production of soybean oil. He expects to sell 360,000 pounds of soybean oil in four months. Soybean oil contracts are available at 60,000 pounds per contract. How could he hedge his position?

Accepted Answer

To hedge against the risk of soybean oil prices falling, the client should sell futures contracts. Since he expects to sell 360,000 pounds and each contract is for 60,000 pounds, he needs to sell 6 contracts (360,000 / 60,000 = 6). This way, if prices fall, the gain on the futures contracts will offset the loss on the physical soybean oil sales.

Question 10

A portfolio manager wishes to hedge a bond portfolio with a value of $750 million and duration of 12.1 years. A 10-year Canada bond futures contract that expires in seven months is quoted at 105.85, and has a $100,000 face value. If the duration of the futures contract is 7.75 years, how many contracts are needed for the hedge?

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Question 11

You purchase four futures contract on 10,000 gallons at a price of $18.75 per gallon. The initial margin is $2,500 per contract, and the maintenance margin is $1,800 per contract. If the contract closes at $18.71 per gallon, what is your new margin balance?

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Question 12

You want to hedge a $500 million dollar bond portfolio with a duration of 12.5 years using 10-year Canada bond futures with a duration 8.5 years. The futures have a multiplier of $100,000 and a price of 102.81. If the futures expire in 5 months, how many contracts do you need to hedge the portfolio?

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Question 13

Why would anyone cross hedge? Give an example where a company would cross hedge and what they would hedge with. What are the potential problems in a cross hedge?

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Question 14

A portfolio manager wants to hedge a stock portfolio with a value of $750 million and a beta of 1.25 with S&P Canada 60 index futures. The quoted price of a six-month futures contract is 1,437.25, and the contract multiplier is $200. How many futures contracts are needed for the hedge?

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Question 15

A recent development in futures and options markets are weather derivatives. One example is a weather futures contract based on a heating or cooling index. The settlement process is similar to an index future where cash is paid based upon the difference between the purchase level and the level of the index at expiration. Is this really gambling?

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Question 16

Compare the pros and cons of a futures hedge with an option hedge.

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Question 17

You purchase 15 futures contracts with an initial margin of $2,500 and a maintenance margin of $1,700. If the futures contracts call for delivery of 50,000 bushels, what is the most the underlying asset can fall in price before you receive a margin call?

Accepted Answer

The initial margin is $2,500 and the maintenance margin is $1,700, so the difference is $800. This is the amount that can be lost per contract before a margin call is triggered. Since each contract is for 50,000 bushels, the price can fall by $800 / 50,000 = $0.016 per bushel before a margin call occurs.

Question 18

Your company must purchase 1,134,000 gallons of heating oil in five months. Heating oil futures are available for 42,000 gallons. How can you hedge this position?

Accepted Answer

To hedge the position of purchasing 1,134,000 gallons of heating oil, the company needs to buy futures contracts. Since futures are available for 42,000 gallons, the company needs to buy 1,134,000 / 42,000 = 27 contracts to fully hedge their position. Therefore, the best choice is option C, which recommends buying 27 contracts.

Question 19

You purchase five futures contracts at a price of $4.32 on 15,000 bushels and an initial margin of $4,500. If the maintenance margin is $3,800, at what price change will you receive a margin call?

Accepted Answer

EA margin call occurs when the account balance falls below the maintenance margin. The initial margin is $4,500, and the maintenance margin is $3,800, so the account can lose $700 ($4,500 - $3,800) before a margin call is triggered. Each contract is for 15,000 bushels, so the total is 75,000 bushels (5 contracts * 15,000 bushels/contract). To find the price change that would result in a $700 loss, divide the loss by the total number of bushels: $700 / 75,000 bushels = $0.00933 per bushel. However, since futures contracts typically move in minimum increments (e.g., $0.01), the actual price change that could trigger a margin call would be slightly larger than the calculated value. The closest options provided that would result in a margin call due to a decrease or increase in price are:- A price decrease of $0.047 (Option A) and a price decrease of $0.038 (Option E). These options represent potential price changes that could decrease the value of the position enough to trigger a margin call. However, the correct calculation based on the given numbers should result in a smaller price change needed to trigger a margin call. The discrepancy suggests a misunderstanding in the calculation or a simplification for the purpose of the question. Given the options, A and E are chosen based on the logic of needing a price decrease to trigger a margin call when holding a long position, but the exact figures provided do not align perfectly with the calculated $0.00933 per bushel.

Question 20

What is the difference between hedging and speculating? Who are the hedgers? Who are the speculators?

Accepted Answer

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Quiz 16: Futures Contracts