HullOFOD10eSolutionsCh02.docx
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HullOFOD10eSolutionsCh02.docx
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HullOFOD10eSolutionsCh02
CHAPTER2
FuturesMarketsandCentralCounterparties
PracticeQuestions
Problem2.1.
Distinguishbetweenthetermsopeninterestandtradingvolume.
Theopeninterestofafuturescontractataparticulartimeisthetotalnumberoflongpositionsoutstanding.(Equivalently,itisthetotalnumberofshortpositionsoutstanding.)Thetradingvolumeduringacertainperiodoftimeisthenumberofcontractstradedduringthisperiod.
Problem2.2.
Whatisthedifferencebetweenalocalandafuturescommissionmerchant?
Afuturescommissionmerchanttradesonbehalfofaclientandchargesacommission.Alocaltradesonhisorherownbehalf.
Problem2.3.
SupposethatyouenterintoashortfuturescontracttosellJulysilverfor$17.20perounce.Thesizeofthecontractis5,000ounces.Theinitialmarginis$4,000,andthemaintenancemarginis$3,000.Whatchangeinthefuturespricewillleadtoamargincall?
Whathappensifyoudonotmeetthemargincall?
Therewillbeamargincallwhen$1,000hasbeenlostfromthemarginaccount.Thiswilloccurwhenthepriceofsilverincreasesby1,000/5,000
$0.20.Thepriceofsilvermustthereforeriseto$17.40perouncefortheretobeamargincall.Ifthemargincallisnotmet,yourbrokerclosesoutyourposition.
Problem2.4.
SupposethatinSeptember2018acompanytakesalongpositioninacontractonMay2019crudeoilfutures.ItclosesoutitspositioninMarch2019.Thefuturesprice(perbarrel)is$48.30whenitentersintothecontract,$50.50whenitclosesoutitsposition,and$49.10attheendofDecember2018.Onecontractisforthedeliveryof1,000barrels.Whatisthecompany’stotalprofit?
Whenisitrealized?
Howisittaxedifitis(a)ahedgerand(b)aspeculator?
AssumethatthecompanyhasaDecember31year-end.
Thetotalprofitis($50.50
$48.30)
1,000
$2,200.Ofthis($49.10
$48.30)
1,000or$800isrealizedonaday-by-daybasisbetweenSeptember2018andDecember31,2018.Afurther($50.50
$49.10)
1,000or$1,400isrealizedonaday-by-daybasisbetweenJanuary1,2019,andMarch2019.Ahedgerwouldbetaxedonthewholeprofitof$2,200in2019.Aspeculatorwouldbetaxedon$800in2018and$1,400in2019.
Problem2.5.
Whatdoesastopordertosellat$2mean?
Whenmightitbeused?
Whatdoesalimitordertosellat$2mean?
Whenmightitbeused?
Astopordertosellat$2isanordertosellatthebestavailablepriceonceapriceof$2orlessisreached.Itcouldbeusedtolimitthelossesfromanexistinglongposition.Alimitordertosellat$2isanordertosellatapriceof$2ormore.Itcouldbeusedtoinstructabrokerthatashortpositionshouldbetaken,providingitcanbedoneatapriceatleastasfavorableas$2.
Problem2.6.
Whatisthedifferencebetweentheoperationofthemarginaccountsadministeredbyaclearinghouseandthoseadministeredbyabroker?
Themarginaccountadministeredbytheclearinghouseismarkedtomarketdaily,andtheclearinghousememberisrequiredtobringtheaccountbackuptotheprescribedleveldaily.Themarginaccountadministeredbythebrokerisalsomarkedtomarketdaily.However,theaccountdoesnothavetobebroughtuptotheinitialmarginlevelonadailybasis.Ithastobebroughtuptotheinitialmarginlevelwhenthebalanceintheaccountfallsbelowthemaintenancemarginlevel.Themaintenancemarginisusuallyabout75%oftheinitialmargin.
Problem2.7.
Whatdifferencesexistinthewaypricesarequotedintheforeignexchangefuturesmarket,theforeignexchangespotmarket,andtheforeignexchangeforwardmarket?
Infuturesmarkets,pricesarequotedasthenumberofU.S.dollarsperunitofforeigncurrency.SpotandforwardratesarequotedinthiswayfortheBritishpound,euro,Australiandollar,andNewZealanddollar.Forothermajorcurrencies,spotandforwardratesarequotedasthenumberofunitsofforeigncurrencyperU.S.dollar.
Problem2.8.
Thepartywithashortpositioninafuturescontractsometimeshasoptionsastothepreciseassetthatwillbedelivered,wheredeliverywilltakeplace,whendeliverywilltakeplace,andsoon.Dotheseoptionsincreaseordecreasethefuturesprice?
Explainyourreasoning.
Theseoptionsmakethecontractlessattractivetothepartywiththelongpositionandmoreattractivetothepartywiththeshortposition.Theythereforetendtoreducethefuturesprice.
Problem2.9.
Whatarethemostimportantaspectsofthedesignofanewfuturescontract?
Themostimportantaspectsofthedesignofanewfuturescontractarethespecificationoftheunderlyingasset,thesizeofthecontract,thedeliveryarrangements,andthedeliverymonths.
Problem2.10.
Explainhowmarginaccountsprotectfuturestradersagainstthepossibilityofdefault.
Marginismoneydepositedbyatraderwithhisorherbroker.Itactsasaguaranteethatthetradercancoveranylossesonthefuturescontract.Thebalanceinthemarginaccountisadjusteddailytoreflectgainsandlossesonthefuturescontract.Iflossesleadtothebalanceinthemarginaccountfallingbelowacertainlevel,thetraderisrequiredtodepositafurthermargin.Thissystemmakesitunlikelythatthetraderwilldefault.Asimilarsystemofmarginaccountsmakesitunlikelythatthetrader’sbrokerwilldefaultonthecontractithaswiththeclearinghousememberandunlikelythattheclearinghousememberwilldefaultwiththeclearinghouse.
Problem2.11.
AtraderbuystwoJulyfuturescontractsonfrozenorangejuiceconcentrate.Eachcontractisforthedeliveryof15,000pounds.Thecurrentfuturespriceis160centsperpound,theinitialmarginis$6,000percontract,andthemaintenancemarginis$4,500percontract.Whatpricechangewouldleadtoamargincall?
Underwhatcircumstancescould$2,000bewithdrawnfromthemarginaccount?
Thereisamargincallifmorethan$1,500islostononecontract.Thishappensifthefuturespriceoffrozenorangejuicefallsbymorethan10centstobelow150centsperpound.$2,000canbewithdrawnfromthemarginaccountifthereisagainononecontractof$1,000.Thiswillhappenifthefuturespricerisesby6.67centsto166.67centsperpound.
Problem2.12.
Showthat,ifthefuturespriceofacommodityisgreaterthanthespotpriceduringthedeliveryperiod,thenthereisanarbitrageopportunity.Doesanarbitrageopportunityexistifthefuturespriceislessthanthespotprice?
Explainyouranswer.
Ifthefuturespriceisgreaterthanthespotpriceduringthedeliveryperiod,anarbitrageurbuystheasset,shortsafuturescontract,andmakesdeliveryforanimmediateprofit.Ifthefuturespriceislessthanthespotpriceduringthedeliveryperiod,thereisnosimilarperfectarbitragestrategy.Anarbitrageurcantakealongfuturespositionbutcannotforceimmediatedeliveryoftheasset.Thedecisiononwhendeliverywillbemadeismadebythepartywiththeshortposition.Neverthelesscompaniesinterestedinacquiringtheassetmayfinditattractivetoenterintoalongfuturescontractandwaitfordeliverytobemade.
Problem2.13.
Explainthedifferencebetweenamarket-if-touchedorderandastoporder.
Amarket-if-touchedorderisexecutedatthebestavailablepriceafteratradeoccursataspecifiedpriceoratapricemorefavorablethanthespecifiedprice.Astoporderisexecutedatthebestavailablepriceafterthereisabidorofferatthespecifiedpriceoratapricelessfavorablethanthespecifiedprice.
Problem2.14.
Explainwhatastop-limitordertosellat20.30withalimitof20.10means.
Astop-limitordertosellat20.30withalimitof20.10meansthatassoonasthereisabidat20.30thecontractshouldbesoldprovidingthiscanbedoneat20.10orahigherprice.
Problem2.15.
Attheendofonedayaclearinghousememberislong100contracts,andthesettlementpriceis$50,000percontract.Theoriginalmarginis$2,000percontract.Onthefollowingdaythememberbecomesresponsibleforclearinganadditional20longcontracts,enteredintoatapriceof$51,000percontract.Thesettlementpriceattheendofthisdayis$50,200.Howmuchdoesthememberhavetoaddtoitsmarginaccountwiththeexchangeclearinghouse?
Theclearinghousememberisrequiredtoprovide
asinitialmarginforthenewcontracts.Thereisagainof(50,200
50,000)
100
$20,000ontheexistingcontracts.Thereisalsoalossof
onthenewcontracts.Themembermustthereforeadd
tothemarginaccount.
Problem2.16.
ExplainwhycollateralrequirementswillincreaseintheOTCmarketasaresultofnewregulationsintroducedsincethe2008creditcrisis.
RegulationsrequiremoststandardOTCtransactionsenteredintobetweenfinancialinstitutionstobeclearedbyCCPs.Thesehaveinitialandvariationmarginrequirementssimilartoexchanges.ThereisalsoarequirementthatinitialandvariationmarginbeprovidedformostbilaterallyclearedOTCtransactionsbetweenfinancialinstitutions.
AsmoretransactionsgothroughCCPstherewillmorenetting.(TransactionswithcounterpartyAcanbenettedagainsttransactionswithcounterpartyBprovidingbothareclearedthroughthesameCCP.)Thiswilltendtooffsettheincreaseincollateralsomewhat.However,itisexpectedthatonbalancetherewillbecollateralincreases.
Problem2.17.
TheforwardpriceontheSwissfrancfordeliveryin45daysisquotedas1.1000.Thefuturespriceforacontractthatwillbedeliveredin45daysis0.9000.Explainthesetwoquotes.WhichismorefavorableforatraderwantingtosellSwissfrancs?
The1.1000forwardquoteisthenumberofSwissfrancsperdollar.The0.9000
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