HW1 FD

Course: Financial Derivatives
Homework Set 1
Due date and time: 8 July 2017 (in the beginning of the session)
Q No 1. An investor enters into a short futures position in 10 contracts in gold at a futures price
of $276.50 per oz. The size of one futures contract is 100 oz. The initial margin per contract is
$1,500, and the maintenance margin is $1,100.
(a) What is the initial size of the margin account?

(b) Suppose the futures settlement price on the first day is $278.00 per oz. What is the new
balance in the margin account? Does a margin call occur? If so, assume that the account is
topped back to its original level.
(c) The futures settlement price on the second day is $281.00 per oz. What is the new balance
in the margin account? Does a margin call occur? If so, assume that the account is topped back
to its original level.
(d) On the third day, the investor closes out the short position at a futures price of $276.00.
What is the final balance in his margin account?
(e) Ignoring interest costs, what are his total gains or losses?
Q No 2. The current price of gold is $642 per troy ounce. Assume that you initiate a long
position in 10 COMEX gold futures contracts at this price on 7-July-2006. The initial margin is 5%
of the initial price of the futures, and the maintenance margin is 3% of the initial price. Assume
the following evolution of gold prices over the next five days, and compute the margin account
assuming that you meet all margin calls.
Date Price per Ounce

7-Jul-06 642
8-Jul-06 640
9-Jul-06 635
10-Jul-06 632
11-Jul-06 620
12-Jul-06 625
Q No 3. An investor enters into 10 short futures contract on the Dow Jones Index at a futures
price of 10,106. Each contract is for 10 the index. The investor closes out five contracts when
the futures price is 10,201, and the remaining five when it is 10,074. Ignoring interest on the
margin account, what are the investor's net profits or losses?
Q No 4. A bakery enters into 50 long wheat futures contracts on the CBoT at a futures price of
$3.52/bushel. It closes out the contracts at maturity. The spot price at this time is $3.59/
bushel. Ignoring interest, what are the bakery's gains or losses from its futures position?
Q No 5. An oil refining company enters into 1,000 long one-month crude oil futures contracts
on NYMEX at a futures price of $43 per barrel. At maturity of the contract, the company rolls
half of its position forward into new one-month futures and closes the remaining half. At this
point, the spot price of oil is $44 per barrel, and the new one-month futures price is $43.50 per
barrel. At maturity of this second contract, the company closes out its remaining position.
Assume the spot price at this point is $46 per barrel. Ignoring interest, what are the company's
gains or losses from its futures positions?
Q No. 6. The forward price of wheat for delivery in three months is $3.90 per bushel, while the
spot price is $3.60. The three-month interest rate in continuously compounded terms is 8% per
annum. Is there an arbitrage opportunity in this market if wheat may be stored costlessly?
Q No. 7. Suppose that the current price of gold is $365 per oz and that gold may be stored
costlessly. Suppose also that the term structure is at with a continuously compounded rate of
interest of 6% for all maturities.
(a) Calculate the forward price of gold for delivery in three months.
(b) Now suppose it costs $1 per oz per month to store gold (payable monthly in advance). What
is the new forward price?
(c) Assume storage costs are as in part (b). If the forward price is given to be $385 per oz,
explain whether there is an arbitrage opportunity and how to exploit it.
Q No. 8. A bond will pay a coupon of $4 in two months' time. The bond's current price is
$99.75. The two-month interest rate is 5% and the three-month interest rate is 6%, both in
continuously compounded terms.
(a) What is the arbitrage-free three-month forward price for the bond?
(b) Suppose the forward price is given to be $97. Identify if there is an arbitrage opportunity
and, if so, how to exploit it.
Q No. 9. Three months ago, an investor entered into a six-month forward contract to sell a
stock. The delivery price agreed to was $55. Today, the stock is trading at $45. Suppose the
three-month interest rate is 4.80% in continuously compounded terms.
(a) Assuming the stock is not expected to pay any dividends over the next three months, what is
the current forward price of the stock?
(b) What is the value of the contract held by the investor?
(c) Suppose the stock is expected to pay a dividend of $2 in one month, and the one-month rate
of interest is 4.70%. What are the current forward price and the value of the contract held by
the investor?
Q No. 10. A three-month forward contract on a non-dividend-paying asset is trading at 90,
while the spot price is 84.
(a) Calculate the implied repo rate.
(b) Suppose it is possible for you to borrow at 8% for three months. Does this give rise to any
arbitrage opportunities? Why or why not?

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Course: Financial Derivatives

(a) What is the initial size of the margin account?

Date Price per Ounce

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